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Collyer products Inc. has a valve division that manufactures and sells a standard valve:
Capacity in units 100,000
Selling price to outside customers $30
Variable costs per unit $16
Fixed costs per unit (based on capacity) $9
The company has a Pump Division that could use this valve in one of its pump. The Pump Division is
currently purchasing 10,000 valves per year from an overseas supplier at a cost of $29 per valve.
Required:
1. Assume that the valve division has enough idle capacity to handle all of the Pump division's needs.
What is acceptable range, if any, for the transfer price between the two divisions?
Selling Price ≥ 16 + 0 = 16
≤ 29
Range 16 - 29
2. Assume that the valve division is selling all of the valves it can produce to outside customers what is
the acceptable range, if any, for the transfer price between the two divisions?
≤ 29
Range NO
1
3. Assume again that valve division is selling all of the valves it can produce to outside customers. Also
assume that $3 in variable expenses can be avoided on transfers within the company, due to reduced
selling costs. What is the acceptable range, if any, for the transfer price between the two divisions?
≤ 29
Range 27 - 29
4. Assume the Pump division needs 20,000 special high-pressure valves per year. The valve division's
variable costs to manufacture and ship the special valve would be $20 per unit. To produce these
special valves, the valve division would have to reduce its production and sales of regular valves from
100,000 units per year to 70,000 units per year, what is the lowest acceptable transfer price?
Solution
Total contribution margin on lost sales
1. Transfer price ≥ Variable cost per unit +
Number of units transferred
0
Transfer price ≥ 16 +
10,000
= $16
2
≥ 10,000