Off Road, 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: B (Click to view the data.) - X i Data Table $ 380 Selling price for final product Long-run average selling price for intermediate product 300 Incremental cost per unit for completion in division B 190 Incremental cost per unit in division A 130 The manager of division B has made the following calculation: Selling price for final product $ 380 Transferred-in cost per unit (market) 300 190 490 Incremental cost per unit for completion $ Contribution (loss) on product (110) 3. Suppose division A quoted a transfer price of $190 for up to 340 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 $190? Explain. 4. Suppose the manager of division A has the option of (a) cutting the external price to 5292, with the certainty that sales will rise to 1,700 units, or (b) maintaining the external price of $300 for the 1,360 units and transferring the 340 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? Off Road, 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: B (Click to view the data.) - X i Data Table $ 380 Selling price for final product Long-run average selling price for intermediate product 300 Incremental cost per unit for completion in division B 190 Incremental cost per unit in division A 130 The manager of division B has made the following calculation: Selling price for final product $ 380 Transferred-in cost per unit (market) 300 190 490 Incremental cost per unit for completion $ Contribution (loss) on product (110) 3. Suppose division A quoted a transfer price of $190 for up to 340 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 $190? Explain. 4. Suppose the manager of division A has the option of (a) cutting the external price to 5292, with the certainty that sales will rise to 1,700 units, or (b) maintaining the external price of $300 for the 1,360 units and transferring the 340 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
