Figure 2
Klaehn Industries is a decentralized company that evaluates its divisions based on ROI. The Fahl Division has the capacity to make 1,000 units of a component. The Fahl Division's variable costs are £40 per unit.
The Melton Division can use the component in one of its products. The Melton Division would incur £50 of variable costs to convert the component into its own product that sells for £160.
-Refer to Figure 2 above. Assume the Fahl Division can sell 800 units at £120 each. Any excess capacity will be unused unless the units are purchased by the Melton Division, which could use up to 100 units. The maximum transfer price that the Melton Division would be willing to pay would be

Question

Quizplus · Accepted Answer

Based on ROI evaluation, the Fahl Division would sell its products at a price that covers variable costs and provides a return on investment. As the Fahl Division can sell 800 of its 1,000 units at £120 each, it would be willing to sell up to 100 units to the Melton Division at a price that is equal to or greater than its own selling price, which is £120. However, the Melton Division incurs additional variable costs (£50) to convert the component into its own product. Therefore, the maximum transfer price that the Melton Division would be willing to pay would be the selling price of its own product (£160) minus the additional variable costs (£50), which is £110. Therefore, the best choice is B.

Figure 2 Klaehn Industries Is a Decentralized Company That Evaluates Its Divisions