IM has been approached by an outside purchaser who has offered to buy 300,000 units of gum base per year at a price of $1.50 per unit. Although IM does not currently have the capacity to take the order, the manager has threatened to reduce the units supplied internally to FP to 700,000 units and accept the external order if FP does not agree to an increase in the transfer price to $1.50 per unit.
Additional Information:
Initial Manufacturing (IM)
Current production (all supplied to FP) 900,000 units
Capacity 1,000,000 units
Outside order volume 300,000 units
External selling price $1.50 per unit
Current internal transfer price $1.00 per unit
Variable cost $0.30 per unit
Current fixed costs (based on 900,000
units) $45,000 per year
Final Production (FP)
Demand 900,000 units
Selling price $1.90 per unit
Variable costs
(not including transferred-in costs) $0.20 per unit
Current transferred-in cost $1.00 per unit
Fixed costs $55,000 per year
Mei is frustrated with their squabbling and is concerned they are not doing what is in the best interest of the company. The gum bases are currently transferred at $1.00 per unit, although no one can remember how this number was chosen. Show all calcs on excel.