XYZ Company has two divisions, X and Y. X makes product X1 and Y makes product Y+. Every unit of product Y+ requires one unit of product X1 as a component. Y purchases most of its X1 requirement from X although sometimes it makes purchases from outside suppliers. Relevant details of products X1 and Y+ are tabulated as follows: Product X1 Product Y+ Established selling price $30 $50 Variable Cost Per Unit - Mat 8 5 Transfer price 30 Labor 5 3 Overhead 2 2 Total Variable Cost 15 40 Fixed Costs 500,000 225,000 Annual Outside Demand 100,000 25,000 Plant Capacity 130,000 30,000 Investment in Divisions: (X) $ 6,625,000 (Y) $ 1,250,000 Division Y is currently achieving an ROI below target. It’s manager blames this on the high transfer price of product X1. The manager of Division X claims that the current transfer price ($30) is appropriate since ‘it is determined by the market’. The manager of division Y argues that the transfer price for X1 should be set ‘at production cost plus a reasonable mark-up’. The manager of Division Y has made two specific proposals aimed at improving his ROI: (a) Pay $50,000 per year for new premises which should allow an additional 5,000 units of Y+ to be sold each year at the existing price (b) The management of XYZ should intervene to reduce the transfer price of the X1. REQUIRED: a. Determine the minimum and maximum transfer price.
XYZ Company has two divisions, X and Y. X makes product X1 and Y makes product Y+. Every unit of product Y+ requires one unit of product X1 as a component. Y purchases most of its X1 requirement from X although sometimes it makes purchases from outside suppliers.
Relevant details of products X1 and Y+ are tabulated as follows:
|
|
Product X1 |
Product Y+ |
|
Established selling price |
$30 |
$50 |
|
Variable Cost Per Unit - Mat |
8 |
5 |
|
Transfer price |
|
30 |
|
Labor |
5 |
3 |
|
|
2 |
2 |
|
Total Variable Cost |
15 |
40 |
|
Fixed Costs |
500,000 |
225,000 |
|
Annual Outside Demand |
100,000 |
25,000 |
|
Plant Capacity |
130,000 |
30,000 |
Investment in Divisions: (X) $ 6,625,000 (Y) $ 1,250,000
Division Y is currently achieving an
(a) Pay $50,000 per year for new premises which should allow an additional 5,000 units of Y+ to be sold each year at the existing price
(b) The management of XYZ should intervene to reduce the transfer price of the X1.
REQUIRED:
a. Determine the minimum and maximum transfer price.
Step by step
Solved in 3 steps
