Chapter 15, Problem 25E

Evaluate Transfer Pricing System

Southwest Division offers its product to outside markets for $30. It incurs variable costs of $11 per unit and fixed costs of $37,500 per month based on monthly production of 4,000 units. Northeast Division can acquire the product from an alternate supplier for $31 per unit or from Southwest Division for a transfer price of $30 plus $2 per unit in transportation costs.

Required

1. a.      What are the costs and benefits of the alternatives available to Southwest Division and Northeast Division with respect to the transfer of Southwest Division’s product? Assume that Southwest Division can market all that it can produce.
2. b.      How would your answer change if Southwest Division had idle capacity sufficient to cover all of Northeast Division’s needs?