Question
Hello here is my question An internal restructuring operation is envisaged for an industrial company whose activity is organized around two business units B1 and
Hello here is my question
An internal restructuring operation is envisaged for an industrial company whose activity is organized around two business units B1 and B2, both having a profit center status.
Unit B1 manufactures and markets P1 parts.
The quantity sold on the external market is 1,800 units at the market unit price of 1,200.
The production capacity is 2,400 units.
The unit production costs for P1 at full capacity are 760, of which 520 are variable costs and 240 are fixed costs per unit (for a production of 2,400 units).
The units sold on the external market (and only those) generate a variable marketing cost of 20 per unit.
Unit B2 manufactures and markets R1 motors. It is envisaged that it will also manufacture a new R2 engine, which would be made from P1 parts supplied by unit B1.
The new R2 motor could be sold for 2,000 per unit on the external market. The management control department has estimated the additional cost of manufacturing R2 by B2 at 600 per unit for the variable part and 240,000 in total for the fixed part. B2 estimates that it could sell 600 units of R2. It would take one part P1 to manufacture one R2 engine.
The transfer price envisaged for the transfer of P1 parts by B1 to B2 would correspond to the current market price, i.e. 1,200.
In fact, B1 has found a new potential external customer to whom it could sell 500 units of a new part, called P2, at a selling price of 1,220. These sales would be in addition to its current external market sales of 1,800 units of P1.
This new production would not change B1's total fixed costs. The manufacturing time for one unit of P2 would be identical to that of one unit of P1. The variable unit cost of production of P2 would be 550. In addition, as with the P1 parts, the P2 parts would generate a variable unit marketing cost of 20.
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