Chic Cycle, 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. Each division 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:

Requirement 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.

Begin by calculating the gain or loss if transfers are made to division B when there is no unused capacity in division A. Select the formula you will use and enter the amounts. (Use parentheses or a minus sign for a loss.)

-

=

Gain (loss) from transfer

-

=

Part 2

Should transfers be made to division B if there is no unused capacity in division A? _______

Yes

No

Part 3 Select the formula you will use to calculate the correct transfer price.

Incremental cost per unit

+

Opportunity cost per unit

=

Minimum transfer price

+

=

Part 4

Is the market price the correct transfer price? _________

Yes

No

Part 5

Requirement 2. Assume that division A's maximum capacity for this product is 1,500 units per month and sales to the intermediate market are now 1,000 units. Assume that for a variety of reasons, division A will maintain the $225 selling price indefinitely. That is, division A is not considering lowering the price to outsiders even if idle capacity exists. Should 500 units be transferred to division B? At what transfer price? Should 500 units be transferred to division B? At what transfer price?

Part 6

Requirement 3. Suppose division A quoted a transfer price of $180 for up to 500 units. What would be the contribution to the company as a whole if a transfer were made? As manager of division B, would you be inclined to buy at $180? Explain.

The contribution to the company as a whole if a transfer were made would be

per unit.

Part 7

Complete the table below using the transfer price of $180 to compute the contribution margin to division B. (Use parentheses or a minus sign for a loss. For amounts with a $0 balance, make sure to enter "0" in the appropriate cell.)

Selling price for final product
Transferred-in cost per unit (market)
Incremental cost per unit for completion
Contribution margin (loss) on product

Part 8

As manager of division B, would you be inclined to buy at $180? Yes comma they are making a profit and therefore this will benefit their division.

Yes, they are making a profit and therefore this will benefit their division. No comma division Upper B has $ 0 contribution at the $ 180 price and would have little incentive to buy.

No, division B has $0 contribution at the $180 price and would have little incentive to buy.

No comma they will have a loss and the division will not accept operating at a loss.No, they will have a loss and the division will not accept operating at a loss.

Part 9

Requirement 4. Suppose the manager of division A has the option of (a) cutting the external price to

$220, with the certainty that sales will rise to 1,500 units, or (b) maintaining the external price of $225

for the 1,000 units and transferring the 500 units to division B at a price that would produce the same operating income for division A. What transfer price would produce the same operating income for division A? Is that price consistent with that recommended by the general guideline so that the resulting decision would be desirable for the company as a whole?

Select the formula to calculate the minimum transfer price, then calculate the minimum transfer price.

Incremental cost per unit

+

Opportunity cost per unit

=

Minimum transfer price

+

=

Part 10

The price ______

is

is not

consistent with the general guidelines based on ______________ a perfectly competitive market for the intermediate product exists.

Selling price for final product	$320
Long-run average selling price for intermediate product	225
Incremental cost per unit for completion in division B	140
Incremental cost per unit in division A	100

The manager of division B has made the following calculation:

Selling price for final product		$320
Transferred-in cost per unit (market)	$225
Incremental cost per unit for completion	140	365
Contribution (loss) on product		$(45)

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.
2.	Assume that division A's maximum capacity for this product is 1,500 units per month and sales to the intermediate market are now 1,000 units. Assume that for a variety of reasons, division A will maintain the $225 selling price indefinitely. That is, division A is not considering lowering the price to outsiders even if idle capacity exists. Should 500 units be transferred to division B? At what transfer price?
3.	Suppose division A quoted a transfer price of $180 for up to 500 units. What would be the contribution to the company as a whole if a transfer were made? As manager of division B, would you be inclined to buy at $180? Explain.
4.	Suppose the manager of division A has the option of (a) cutting the external price to $220, with the certainty that sales will rise to 1,500 units, or (b) maintaining the external price of $225 for the 1,000 units and transferring the 500 units to division B at a price that would produce the same operating income for division A. What transfer price would produce the same operating income for division A? Is that price consistent with that recommended by the general guideline so that the resulting decision would be desirable for the company as a whole?