10-7

The Glass Division of Westfall manufactures a variety of glasses and vases for household use. The vases
can be sold externally or internally to Westfall’s Florist Division. Sales and cost data on a basic 10- inch
vase are given below;

Unit selling price $2.70

Unit variable cost $1.25

*Unit product fixed cost $0.50

Practical capacity in units 500,000

*$250,000/500,000

During the coming year, the Glass Division expects to sell 400,000 units of this vase. The Florist Division
currently plans to buy 150,000 vases on the outside market for $2.70 each. The manager of the Glass
Division, approached the manager of the Florist Division and offered to sell the 150,000 vases for $2.65.
The Glass Division manager explained to the Florist Division manager that he can avoid selling costs of
$0.10 per vase by selling internally and that he would split the saving by offering a $0.05 discount on
the usual price.

Required :

(i) What is the minimum transfer that the Glass Division would be willing to accept? What is
the maximum transfer price that the Florist Division would be willing to pay? Should an
internal transfer take place? What would be the benefit or loss to the firm as a whole if the
internal transfer takes place?
(ii) Suppose The Florist Division’s manager knows that the Glass Division has idle capacity. Do
you think that she would agree to the transfer price of $2.65? Suppose she counters with an
offer to pay $2.00. If you were the manager of the Glass Division would you be interested in
this price? Explain with supporting computations.
(iii) Suppose that Westfall’s policy is that all internal transfers take place at full manufacturing
cost. What would the transfer price be? Would the transfer take place?