Question
Popular Pump Inc. (PPI), has several divisions and has a performance management system that compensates division managers based on operating income. One of it's divisions,
Popular Pump Inc. (PPI), has several divisions and has a performance management system that compensates division managers based on operating income. One of it's divisions, P1, currently purchases pump impellers used in each pump from outside suppliers. Another division of PPI: division Z1, produces similar impellers and currently sells to outside customers only. The management of both divisions, P1 and Z1 have met to discuss the opportunity for Z1 to supply the impellers to P1. If Z1 manufactures the impellers for P1, then Z1 will incur variable cost of $59.00 per impeller.
Division Z1 has a total fixed cost of $580 thousand, and currently operates at eighty percent capacity. Z1 sells the impellers to outside customers for $129 each with annual sales of 50 thousand. Selling to outside customers incurs direct labour and direct materials totalling $70 and variable marketing costs of $8 per impeller.
Division P1 currently purchases the impellers from an outside supplier. Selling price per Punp $319 Cost to Purchase impellers $79
other direct materials 10 Fixed cost 40 Gross margin 190 Variable marketing cost 35
fixed marketing cost 15 Operating income per pump 140 For each of the required below, please show all format statements and analysis and label each number. Showing numbers ONLY are not sufficient. 1 Division P1 would like to purchase 25 thousand impellers from Z1 at a price of $76 per impeller. What would be the impact of (a)accepting the offer on Z1 operating income, and (b) the impact on PPl's profits. Consider that Division P1 could purchase from multiple suppliers and would accept partial shipment from 2 Division Z1. How many units should Z1 sell to Division P1 at $76 per unit, if any? What would be the effect on Division Z1's operating income (to the nearest whole dollar)? What would be the effect on the operating income of PPI. as a whole? 3 What is the range of transfer prices over which the divisional managers might negotiate a final transfer price? Provide a rationale for the range you provide.
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