Flugel Enterprises is a decentralized company that evaluates its divisions based on their reported return on investment. One of Flugel's divisions, the Pipe division, manufactures pipe fittings that are used by the Equipment division as well as other users outside the organization. Pipe has the capacity to make only 3,000 of these fittings at a variable cost of £12 per fitting. Fixed costs of the Pipe division are £90,000 per period and include costs that are common to other products the Pipe division makes. Fixed costs allocated to the fittings sold to the Equipment division are £24,000 per period.
The Equipment division uses the fittings and incurs £100 per unit of additional variable costs to make the equipment that sells on the open market for £150. Equipment expects to sell 1,000 pieces of equipment this period. Fixed costs of this division related to depreciation on past expenditures are estimated at £30,000.
Fittings like those transferred from Pipe to Equipment sell on the open market for £25 each.
Top management of the organization allows divisions to negotiate transfer prices and has a policy of not inferring with the negotiation process.
Required:
a.
What is the absolute minimum price Pipe would accept from Equipment for the fittings if Pipe has excess capacity? State any assumptions necessary to answer the question.
b.
What is the maximum price Equipment would pay the Pipe division for the fittings?
c.
What is the minimum price Pipe would accept if Pipe is operating at capacity to fill orders for these fittings on the open market?

Question

Quizplus · Accepted Answer

The Answer of Flugel Enterprises is a decentralized company that evaluates its divisions based on their reported return on investment. One of Flugel's divisions, the Pipe division, manufactures pipe fittings that are used by the Equipment division as well as other users outside the organization. Pipe has the capacity to make only 3,000 of these fittings at a variable cost of £12 per fitting. Fixed costs of the Pipe division are £90,000 per period and include costs that are common to other products the Pipe division makes. Fixed costs allocated to the fittings sold to the Equipment division are £24,000 per period.
The Equipment division uses the fittings and incurs £100 per unit of additional variable costs to make the equipment that sells on the open market for £150. Equipment expects to sell 1,000 pieces of equipment this period. Fixed costs of this division related to depreciation on past expenditures are estimated at £30,000.
Fittings like those transferred from Pipe to Equipment sell on the open market for £25 each.
Top management of the organization allows divisions to negotiate transfer prices and has a policy of not inferring with the negotiation process.
Required:
a.
What is the absolute minimum price Pipe would accept from Equipment for the fittings if Pipe has excess capacity? State any assumptions necessary to answer the question.
b.
What is the maximum price Equipment would pay the Pipe division for the fittings?
c.
What is the minimum price Pipe would accept if Pipe is operating at capacity to fill orders for these fittings on the open market?

Flugel Enterprises Is a Decentralized Company That Evaluates Its Divisions