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Forever Inc. makes suits and has two division - Buttons Division and Stitching Division. The Stitching Division stitches and sells 1000 suits for $90 each.
Forever Inc. makes suits and has two division - Buttons Division and Stitching Division. The Stitching Division stitches and sells 1000 suits for $90 each. For this, they need to purchase buttons from the Buttons Division (6 buttons per suit). Stitching Division cannot buy buttons from an external supplier. However, Buttons Division can sell to an external consumer for $5 per button until it has filled capacity. Forever Inc set the transfer price at $5 per button. Below is the information about the two divisions: Buttons Division Stitching Division 6000 1000 Buttons (units) Direct material cost per unit $1.50 $25 Suits (units) Direct material cost per unit (excl buttons) Direct labor cost per unit Variable manufacturing overhead cost per unit $0.75 $15 Direct labor cost per unit Variable manufacturing overhead cost per unit $0.25 $10 $0.75 Fixed manufacturing overhead cost per unit Fixed manufacturing overhead cost per unit $15 11. (a) What is the short-run minimum transfer price per button the Buttons Division will demand from the Stitching Division? (b) What the short-run maximum transfer price that the Stitching division is willing to pay to buy from the Buttons Division? 12. (a) From a corporate headquarters perspective, will corporate operating income increase or decrease as a result of the internal trade between the divisions? By how much? (b) Will a transfer price of $5 result in goal congruent decisions of the two divisions? Explain briefly
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