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 the icon to view the data.) Read the requirements Requirement 1. Should transfers be made to division B if there is no unused capacity in division A? Is the market price the correct transfer price? Show your computations. Begin by calculating the gain or loss if transfers are made to division B when there is no unused capacity in division A. Select the formula you will use and enter the amounts. (Use parentheses or a minus sign for a loss.) Incremental cost Gain (loss) from transfer Data table - X Requirements 380 300 190 90 Selling price for final product $ Long-run average selling price for intermediate product Incremental cost per unit for completion in division B Incremental cost per unit in division A The manager of division B has made the following calculation: Selling price for final product $ Transferred-in cost per unit (market) $ 300 Incremental cost per unit for completion 190 $ Contribution (loss) on product 1. Should transfers be made to division B if there is no unused capacity in division A? Is the market price the correct transfer price? Show your computations 2. Assume that division A's maximum capacity for this product is 1,700 units per month and sales to the intermediate market are now 1,360 units. Assume that for a variety of reasons, division A will maintain the $300 selling price indefinitely. That is, division A is not considering lowering the price to outsiders even if idle capacity exists. Should 340 units be transferred to division B? At what transfer price? 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 $292, 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? 380 490 (110) Print Done I Clear all Final check 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 the icon to view the data.) Read the requirements Requirement 1. Should transfers be made to division B if there is no unused capacity in division A? Is the market price the correct transfer price? Show your computations. Begin by calculating the gain or loss if transfers are made to division B when there is no unused capacity in division A. Select the formula you will use and enter the amounts. (Use parentheses or a minus sign for a loss.) Incremental cost Gain (loss) from transfer Data table - X Requirements 380 300 190 90 Selling price for final product $ Long-run average selling price for intermediate product Incremental cost per unit for completion in division B Incremental cost per unit in division A The manager of division B has made the following calculation: Selling price for final product $ Transferred-in cost per unit (market) $ 300 Incremental cost per unit for completion 190 $ Contribution (loss) on product 1. Should transfers be made to division B if there is no unused capacity in division A? Is the market price the correct transfer price? Show your computations 2. Assume that division A's maximum capacity for this product is 1,700 units per month and sales to the intermediate market are now 1,360 units. Assume that for a variety of reasons, division A will maintain the $300 selling price indefinitely. That is, division A is not considering lowering the price to outsiders even if idle capacity exists. Should 340 units be transferred to division B? At what transfer price? 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 $292, 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? 380 490 (110) Print Done I Clear all Final check
