Scottish Souvenirs Company has a Sewing Division that does sewing work of various types. The company's Overseas Division has asked the Sewing Division to provide it with 4,000 special silk scarves each year on a continuing basis. The special silk scarf would require £28 per unit in variable production costs. The Overseas Division has a bid from an outside supplier for the special silk scarf at £44.00 per unit. In order to have time and space to produce the new special silk scarf, the Sewing Division would have to cut back production of another scarf - the Classic- which it presently is producing. The Classic scarf sells for £30 per unit, and requires £22 per unit in variable production costs. Boxing and shipping costs of the Classic scarf are £4 per unit. Boxing and shipping costs of £7 per unit (special silk scarf) will also be incurred on internal transfers. The company is now producing and selling 100,000 units of the Classic scarf each year. Production and sales of the Classic scarf would drop by 10% if the new special silk scarf was produced. Required: A) What is the range of transfer prices, if any, within which both the Divisions' profits would increase as a result of agreeing to the transfer of 4,000 special silk scarves per year from the Sewing Division to the Overseas Division? (Show supporting computations). B) Is it in the best interest of the Scottish Souvenirs Company for this transfer to take place? Explain. (Support your answer with appropriate calculations)

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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Scottish Souvenirs Company has a Sewing Division that does sewing work of various types. The company's Overseas Division has asked the Sewing Division to provide it with 4,000 special silk scarves each year on a continuing basis. The special silk scarf would require £28 per unit in variable production costs. The Overseas Division has a bid from an outside supplier for the special silk scarf at £44.00 per unit. In order to have time and space to produce the new special silk scarf, the Sewing Division would have to cut back production of another scarf - the Classic- which it presently is producing. The Classic scarf sells for £30 per unit, and requires £22 per unit in variable production costs. Boxing and shipping costs of the Classic scarf are £4 per unit. Boxing and shipping costs of £7 per unit (special silk scarf) will also be incurred on internal transfers. The company is now producing and selling 100,000 units of the Classic scarf each year. Production and sales of the Classic scarf would drop by 10% if the new special silk scarf was produced. Required: A) What is the range of transfer prices, if any, within which both the Divisions' profits would increase as a result of agreeing to the transfer of 4,000 special silk scarves per year from the Sewing Division to the Overseas Division? (Show supporting computations). B) Is it in the best interest of the Scottish Souvenirs Company for this transfer to take place? Explain. (Support your answer with appropriate calculations)

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