Europa, Inc., has two divisions, A and B, which manufacture expensive bicycles. Division A produces the bicycle frame, and Division B assembles the rest of the bicycle onto the frame. There is a market for both the subassembly and the final product. Each division has been designated as a profit centre. The transfer price for the subassembly has been set at the long-run average market price. The following data are available for each division:
Selling price for final product ………….. $300
Long-run average selling price for intermediate product….. 200
Incremental cost per unit for completion in Division B…. 150
Incremental cost per unit in Division A………. 120
The manager of Division B has made the following calculation:
1. Should transfers be made to Division B if there is no unused capacity in Division A? Is the market price the correct transfer price? Show your computations.
2. Assume that Division A’s maximum capacity for this product is 1,000 units per month and sales to the intermediate market are now 800 units. Should 200 units be transferred to Division B? At what transfer price? Assume that for a variety of reasons, Division A will maintain the $200 selling price indefinitely. That is, Division A is not considering lower ing the price to outsiders even if idle capacity exists.
3. Suppose Division A quoted a transfer price of $150 for up to 200 units. What would be the contribution to the company as a whole if a transfer were made? As manager of Division B, would you be inclined to buy at $150? Explain.