The Caplow Company is a multi-divisional company. Its managers have been delegated full profit responsibility and complete autonomy to accept or reject transfers from other divisions.

Division A produces a subassembly with a ready competitive market. This subassembly is currently used by Division B for a final product which is sold outside at $1,200 per unit.

Division A charges Division B the market price of $700 per unit for the subassembly.

Variable costs are $520 per unit and $600 per unit for Divisions A and B, respectively.

The manager of Division B feels that Division A should transfer the subassembly at a lower price than market because at market price Division B is unable to make profit.

Required:

a. Assuming transfers are made at the market price, compute Division B's profit contribution per unit and the total profit contribution per unit for the company.

b. Assume that Division A can sell all its production in the open market. Should Division A transfer goods to Division B? If so, at what price?

c. Assume Division A can sell only 500 units at $700 per unit (out of the 1,000 which it can produce every month)in the open market and that a 20 percent reduction in price is necessary to sell full capacity. Should transfers be made to Division B? If so, how many units should be transferred and at what price? Submit a schedule showing comparisons of profit contribution under the different available alternatives to support your decision.

(SMA adapted)

LO.1