Negotiating a Transfer Price with Excess Capacity

The Foundry Division of Findlay Pumps Inc. produces metal parts that are sold to the company's Assembly Division and to outside customers. Operating data for the Foundry Division for the current year are as follows:

To the Assembly

Division

To Outside

Customers

TotalSales600,000 parts x $8.00$4,800,000400,000 parts x $9.00$3,600,000$8,400,000Variables expenses at $3.75(2,250,000)(1,500,000)(3,750,000)Contribution margin2,550,0002,100,0004,650,000Fixed expenses*(1,350,000)(900,000)(2,250,000)Net income$1,200,000$1,200,000$2,400,000*Allocated on the basis of unit sales.

The Assembly Division has just received an offer from an outside supplier to supply parts at $5.50 each. The Foundry Division manager is not willing to meet the $5.50 price. She argues that it costs her $6.00 per part to produce and sell to the Assembly Division, so she would show no profit on the Assembly Division sales. Sales to outside customers are at a maximum, 400,000 parts.

a. Verify the Foundry Division's $6 unit cost figure.

Variable costs

Fixed costs

Total unit cost

c. Could the Foundry Division meet the $5.50 price and still show a net profit for sales to the Assembly Division? Show computations.

Use a negative sign only to indicate anet loss. Otherwise do not use negative signs with your answers.

Sales to Assembly Division at $5.50 priceSales

Variable costs

Contribution margin

Fixed costs

Net profit (loss)