Leith Tramways Limited has a Castings Division which does casting work of various types. The company's Machine Products Division has asked the Castings Division to provide it with 20,000 special castings each year on a continuing basis. The special casting would require £10 per unit in variable production costs. The Machine Products Division has a bid from an outside supplier for the castings of £29 per unit. In order to have time and space to produce the new casting, the Castings Division would have to cut back production of another casting - the TramMode which it presently is producing. The TramMode sells for £30 per unit, and requires £12 per unit in variable production costs. Boxing and shipping costs of the TramMode are £4 per unit. Boxing and shipping costs for the new special casting would be only £1 per unit. The company is now producing and selling 100,000 units of the TramMode each year. Production and sales of this casting would drop by 20% if the new casting is produced. Required: a. What is the range of transfer prices within which both the Divisions' profits would increase as a result of agreeing to the transfer of 20,000 castings per year from the Castings Division to the Machine Products Division? b. Discuss if it is in the best interests of Leith Tramways Limited for this transfer to take place.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Leith Tramways Limited has a Castings Division which does casting work of various types. The company's Machine Products Division has asked the Castings Division to provide it with 20,000 special castings each year on a continuing basis. The special casting would require £10 per unit in variable production costs. The Machine Products Division has a bid from an outside supplier for the castings of £29 per unit. In order to have time and space to produce the new casting, the Castings Division would have to cut back production of another casting - the TramMode which it presently is producing. The TramMode sells for £30 per unit, and requires £12 per unit in variable production costs. Boxing and shipping costs of the TramMode are £4 per unit. Boxing and shipping costs for the new special casting would be only £1 per unit. The company is now producing and selling 100,000 units of the TramMode each year. Production and sales of this casting would drop by 20% if the new casting is produced. Required: a. What is the range of transfer prices within which both the Divisions' profits would increase as a result of agreeing to the transfer of 20,000 castings per year from the Castings Division to the Machine Products Division? b. Discuss if it is in the best interests of Leith Tramways Limited for this transfer to take place.

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