Desks Unlimited makes all types of office desks. The Computer Desk Division is currently producing 10,000 desks per year with a capacity of 15,000 desks. The variable costs assigned to each desk are $400 and annual fixed costs of the division are $900,000. The computer desk has a market price of $600. The Executive Division wants to buy 5,000 desks from the Computer division at $460 for its custom office design business. The Computer Division manager knows that the division will save $50 of the Variable costs since there will be no variable shipping or commissions to be paid on the transfer order. However, the Computer Desk manager refused the order because the price is below full cost. The Executive Division manager argues that the order should be accepted because it will lower the fixed cost per desk from $90 to $60 and will take the division to its capacity, thereby causing operations to be at their most efficient level. [This is how he came up with the offered $460 transfer price ($400 + $60.)] Consider each division and the firm as a whole. Show your work and clearly label your answers to the following: a. What is the appropriate transfer price range? b. If the Computer Division accepts the $460 price per unit and a transfer is made, is the firm overall better or worse off and by how much? c. If the Computer Division accepts the $460 price and a transfer is made, how much better or worse off is the Computer Division?
Desks Unlimited makes all types of office desks. The Computer Desk Division is currently producing 10,000 desks per year with a capacity of 15,000 desks. The variable costs assigned to each desk are $400 and annual fixed costs of the division are $900,000. The computer desk has a market price of $600.
The Executive Division wants to buy 5,000 desks from the Computer division at $460 for its custom office design business. The Computer Division manager knows that the division will save $50 of the Variable costs since there will be no variable shipping or commissions to be paid on the transfer order. However, the Computer Desk manager refused the order because the price is below full cost.
The Executive Division manager argues that the order should be accepted because it will lower the fixed cost per desk from $90 to $60 and will take the division to its capacity, thereby causing operations to be at their most efficient level. [This is how he came up with the offered $460 transfer price ($400 + $60.)]
Consider each division and the firm as a whole. Show your work and clearly label your answers to the following:
a. What is the appropriate transfer price range?
b. If the Computer Division accepts the $460 price per unit and a transfer is made, is the firm overall better or worse off and by how much?
c. If the Computer Division accepts the $460 price and a transfer is made, how much better or worse off is the Computer Division?
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