The Commando Motorcycle Company has decided to become decentralized and split its operations into two divisions, Motor and Assembly. Both divisions will be treated as investment centers. The Motor Division is currently operating at its capacity of 30,000 motors per year. Motor's costs at this level of production are as follows: Motor sells 10,000 of its motors to a snowmobile manufacturer and transfers the remaining 20,000 motors to the Assembly Division. The two divisions are currently in a debate over an appropriate transfer price to charge for the 20,000 motors. Motor currently charges the snowmobile manufacturer $200 per motor. The final selling price of the motorcycles that Commando produces is $7,200 per cycle. This selling price will not change regardless of the transfer price charged between the two divisions. Motor has no market for the 20,000 motors if they are not transferred to Assembly. Variable selling and administrative costs are incurred on both internal and external sales.
-The Pump Division of Nord Co. produces pumps which it sells for $20 each to outside customers. The pump Division's cost per pump, based on normal volume of 500,000 units per period, is shown below:
Nord has recently purchased a small company which makes automatic dishwashers. This new company is presently purchasing 100,000 pumps each year from another manufacturer. Since the Pump Division has a capacity of 600,000 pumps per year and is now selling only 500,000 pumps to outside customers, management would like the new Dishwasher Division to begin purchasing its pumps internally. The Dishwasher Division is now paying $20 per pump, less a 10% quantity discount. The Pump Division could avoid $1 per unit in variable costs on any sales to the Dishwasher Division.
Required:
a. Treating each division as an independent profit center, within what price range should the internal sales price fall?
b. Now assume that the Pump Division is selling 600,000 pumps per year on the outside. Determine the appropriate transfer price. Show all computations.
(Note: Due limitations in fonts and word processing software, > and < signs must be used in this solution rather than "greater than or equal to" and "less than or equal to" signs.)

Question

The Commando Motorcycle Company has decided to become decentralized and split its operations into two divisions, Motor and Assembly. Both divisions will be treated as investment centers. The Motor Division is currently operating at its capacity of 30,000 motors per year. Motor's costs at this level of production are as follows:  Motor sells 10,000 of its motors to a snowmobile manufacturer and transfers the remaining 20,000 motors to the Assembly Division. The two divisions are currently in a debate over an appropriate transfer price to charge for the 20,000 motors. Motor currently charges the snowmobile manufacturer $200 per motor. The final selling price of the motorcycles that Commando produces is $7,200 per cycle. This selling price will not change regardless of the transfer price charged between the two divisions. Motor has no market for the 20,000 motors if they are not transferred to Assembly. Variable selling and administrative costs are incurred on both internal and external sales.
-The Pump Division of Nord Co. produces pumps which it sells for $20 each to outside customers. The pump Division's cost per pump, based on normal volume of 500,000 units per period, is shown below:  
Nord has recently purchased a small company which makes automatic dishwashers. This new company is presently purchasing 100,000 pumps each year from another manufacturer. Since the Pump Division has a capacity of 600,000 pumps per year and is now selling only 500,000 pumps to outside customers, management would like the new Dishwasher Division to begin purchasing its pumps internally. The Dishwasher Division is now paying $20 per pump, less a 10% quantity discount. The Pump Division could avoid $1 per unit in variable costs on any sales to the Dishwasher Division.
Required:
a. Treating each division as an independent profit center, within what price range should the internal sales price fall?
b. Now assume that the Pump Division is selling 600,000 pumps per year on the outside. Determine the appropriate transfer price. Show all computations.
(Note: Due limitations in fonts and word processing software, > and < signs must be used in this solution rather than "greater than or equal to" and "less than or equal to" signs.)

Quizplus · Accepted Answer

The Answer of The Commando Motorcycle Company has decided to become decentralized and split its operations into two divisions, Motor and Assembly. Both divisions will be treated as investment centers. The Motor Division is currently operating at its capacity of 30,000 motors per year. Motor's costs at this level of production are as follows:  Motor sells 10,000 of its motors to a snowmobile manufacturer and transfers the remaining 20,000 motors to the Assembly Division. The two divisions are currently in a debate over an appropriate transfer price to charge for the 20,000 motors. Motor currently charges the snowmobile manufacturer $200 per motor. The final selling price of the motorcycles that Commando produces is $7,200 per cycle. This selling price will not change regardless of the transfer price charged between the two divisions. Motor has no market for the 20,000 motors if they are not transferred to Assembly. Variable selling and administrative costs are incurred on both internal and external sales.
-The Pump Division of Nord Co. produces pumps which it sells for $20 each to outside customers. The pump Division's cost per pump, based on normal volume of 500,000 units per period, is shown below:  
Nord has recently purchased a small company which makes automatic dishwashers. This new company is presently purchasing 100,000 pumps each year from another manufacturer. Since the Pump Division has a capacity of 600,000 pumps per year and is now selling only 500,000 pumps to outside customers, management would like the new Dishwasher Division to begin purchasing its pumps internally. The Dishwasher Division is now paying $20 per pump, less a 10% quantity discount. The Pump Division could avoid $1 per unit in variable costs on any sales to the Dishwasher Division.
Required:
a. Treating each division as an independent profit center, within what price range should the internal sales price fall?
b. Now assume that the Pump Division is selling 600,000 pumps per year on the outside. Determine the appropriate transfer price. Show all computations.
(Note: Due limitations in fonts and word processing software, > and < signs must be used in this solution rather than "greater than or equal to" and "less than or equal to" signs.)

The Commando Motorcycle Company Has Decided to Become Decentralized and Split