P12.41 Multiple interdivisional transfers; accept or reject outside contract: manufacturer LO 12.13 @ Page 615 Reebutt Industries consists of three decentralised divisions: Cromwell Division, Brandon Division and Gerard Division. The managing director of Reebutt Industries has given the managers of the three divisions the authority to decide whether to sell their products outside the company or between themselves at a transfer price they negotiate. The external market for the company's products is very active and there are many competitors, so sales made internally or externally by the divisions will not affect market prices. Intermediate markets will always be available for Cromwell, Brandon and Gerard to purchase their manufacturing needs or sell their product. Each division's manager attempts to maximise its contribution margin at the current level of operating assets for the division. The manager of Brandon Division is currently considering the following two orders: Gerard Division needs 5 000 units of a motor that can be supplied by Brandon Division. To manufacture these motors, Brandon would purchase components from Cromwell Division at a transfer price of $1 000 per unit. Cromwell's variable cost for these components is $550 per unit. Brandon Division would further process these components at a variable cost of $850 per unit. Westminster Company wants to order 4 500 motors from the Brandon Division. This is a custom-built product and the price will be $2 075 per unit. Brandon would purchase components for these motors from Cromwell Division at a transfer price of $850 per unit. Cromwell's variable cost for these components is $475 per unit. Brandon Division will further process these components at a variable cost of $700 per unit. Brandon Division's plant capacity is limited, and the division can accept either the Westminster Company order or the Gerard order, but not both. The managing director of Reebutt Industries and the manager of Brandon Division agree that it would not be beneficial to increase capacity. If Gerard Division cannot obtain the motors from Brandon Division, it will purchase the motors from Fawkes Company, which has offered to supply the same motors to Gerard Division at a price of $2 350 per unit. Fawkes Company would also purchase 5 000 components from Cromwell Division at a price of $700 each. Cromwell's variable cost for these components is $400 per unit. Required: 1. If the manager of Brandon Division wants to maximise the division's short-run contribution margin, determine whether Brandon Division should: (a) sell motors to Gerard Division at the prevailing market price; or (b) accept the Westminster Company order. 2. Independent of your answer to requirement 1, assume that Brandon Division decides to accept the Westminster Company contract. Determine whether this decision is in the best interests of Reebutt Industries
