22-28

Pertinent transfer price, perfect and imperfect markets.Wheely, Inc., has two divisions, A and B, that manufacture expensive bicycles. Division A produces the bicycle frame, and division B assembles the rest of the bicycle onto the frame. There is a market for both the subassembly and the final product. Each869870division has been designated as a profit center. The transfer price for the subassembly has been set at the long-run average market price. The following data are available for each division:

Selling price for final product	$360
Long-run average selling price for intermediate product	275
Incremental cost per unit for completion in division B	20
Incremental cost per unit in division A	90

The manager of division B has made the following calculation:

Selling price for final product		$360
Transferred-in cost per unit (market)	$275
Incremental cost per unit for completion	120	395
Contribution (loss) on product		$ (35)

Q#1:Should transfers be made to division B if there is no unused capacity in division A? Is the market price the correct transfer price? Show your computations.

Q#2: Assume that division As maximum capacity for this product is 1,200 units per month and sales to the intermediate market are now 900 units. Should 300 units be transferred to division B? At what transfer price? Assume that for a variety of reasons, division A will maintain the $275 selling price indefinitely. That is, division A is not considering lowering the price to outsiders even if idle capacity exists.