Krenski Corporation has a Parts Division that does work for other Divisions in the company as well as for outside customers. The company's Equipment Division has asked the Parts Division to provide it with 10,000 special parts each year. The special parts would require £12.00 per unit in variable production costs.
The Equipment Division has a bid from an outside supplier for the special parts at £31.00 per unit. In order to have time and space to produce the special part, the Parts Division would have to cut back production of another part-the TW3 that it presently is producing. The TW3 sells for £35.00 per unit, and requires £13.00 per unit in variable production costs. Packaging and shipping costs of the TW3 are £3.00 per unit. Packaging and shipping costs for the new special part would be only £2.00 per unit. The Parts Division is now producing and selling 50,000 units of the TW3 each year. Production and sales of the TW3 would drop by 10% if the new special part is produced for the Equipment Division.
-The minimum transfer price for the Parts Division is

Question

Quizplus · Accepted Answer

The minimum transfer price for the Parts Division should cover the variable production costs of the special parts (£12.00 per unit) plus the opportunity cost of not producing the TW3 part. The opportunity cost per unit for the TW3 part is the contribution margin lost by not selling it, which is the selling price (£35.00) minus the variable costs (£13.00) and packaging and shipping costs (£3.00), equaling £19.00 per unit. Since production and sales of the TW3 would drop by 10% (5,000 units), and the Parts Division would produce 10,000 units of the special part, the opportunity cost needs to be spread over these 10,000 units. Therefore, the opportunity cost per special part is (£19.00 * 5,000 units) / 10,000 units = £9.50. Adding this to the variable production cost of the special part (£12.00) gives a minimum transfer price of £21.50. However, since none of the provided options exactly match this calculation and considering the closest option provided, there seems to be a mistake in the calculation interpretation or in the options given. The correct approach involves considering both the variable costs and the opportunity costs, but the exact answer provided in the options might not accurately reflect this calculation. Given the options, £23.50 seems to be chosen in error due to a misunderstanding of the calculation process. Reevaluating the correct calculation: The variable cost of the special part is £12.00, and the opportunity cost is calculated based on the net loss from not producing the TW3, which should correctly factor in the reduction in production and the contribution margin of the TW3. The correct calculation should closely examine the contribution margin of the TW3 and how the reduction in its production for the special parts impacts the Parts Division's finances, leading to a precise calculation of the minimum transfer price. However, without the exact match in the provided options and based on the initial explanation, there seems to be a misunderstanding in selecting the correct answer from the provided choices.

Krenski Corporation Has a Parts Division That Does Work for Other