Homework #2 MSBA 2020

Student - 3035888384
Collyer Products, Inc. has a Valve Division that manufactures and sells regular valves:

Capacity in units …………………………………………. 100,000 units

Selling price to outside customers per unit…………….. $30
Variable costs per unit sold to outside customers………. $16
Fixed cost per unit (based on capacity)….......................... $9
The company has a Pump Division that could use this valve in one of its pumps. The
Pump Division is currently purchasing 10,000 regular valves per year from an outside
supplier at a price of $29 per valve.

Required:

(a) Assume that the Valve Division has enough capacity to handle all of the Pump
Division’s needs. There is no deduction in the costs for the internally-transferred
units. What is the Valve Division’s lowest acceptable transfer price? What is the
Pump Division’s highest acceptable transfer price of the regular valves?

(b) Assume that the Valve Division is selling all of the valves it can produce at the
capacity to outside customers (i.e., produces 100,000 units and sells all the products
to outside customers). Also, assume that the $3 variable selling expenses can be
avoided if the valves are sold internally to Pump Divisions, due to reduced selling
costs. What is the Valve Division’s lowest acceptable transfer price? What is the
Pump Division’s highest acceptable transfer price of the regular valves?

(c) Assume that the Valve Division is selling all of the regular valves it can produce at
the capacity to outside customers (i.e., produces 100,000 units and sells all the
products to outside customers). Also, assume that the Pump Division needs 10,000
special high-pressure valves per year (not the 10,000 regular valves per year as stated
above). The Valve Division’s variable costs to manufacture and ship the special
valves to Pump Division would be $20 per unit. To produce these 10,000 special
valves, the Valve Division would have to reduce its production and sales of the
regular valves from 100,000 units per year to 70,000 units per year. What is the Valve
Division’s lowest acceptable transfer price for the special valves?

1
Provide your answers:

a) As the Valve division has idle capacity the minimum acceptable transfer for them
would be its variable cost i.e. $16.
Maximum acceptable transfer price for the Pump div. would be its outside
purchase price i.e. $29.
The acceptable range $16 - $29

b) Valve division minimum TP = Variable cost + contribution lost

= (16-3)+9
= $22
Maximum acceptable TP by pump div. = $29
The acceptable range is $22 - $29

c) Lowest acceptable transfer price

Variable cost = $20
Contribution lost = (100,000 – 70,000)*9 / 10,000 = $27
Lowest Transfer Price = $47