Question
Question 4 (Total: 20 marks) Heisenberg Corporation has a Moldings Division that does molding work of various types. The company's Machine Products Division has asked
Question 4 (Total: 20 marks)
Heisenberg Corporation has a Moldings Division that does molding work of various types. The company's Machine Products Division has asked the Moldings Division to provide it with 20,000 special moldings each year on a continuing basis. The special moldings would require $10 per unit in variable production costs. The Machine Products Division has a bid from an outside supplier of $29 per unit for the moldings.
In order to have time and space to produce the new moldings, the Moldings Division would have to cut back production of another molding: the Blue4, which it presently is producing. The Blue4 sells for $30 per unit, and requires $12 per unit in variable production costs. Boxing and shipping costs of the Blue4 are $4 per unit. Boxing and shipping costs for the new special molding would be only $1 per unit. The company is now producing and selling 100,000 units of the Blue4 each year. Production and sales of this molding would drop by 20% if the new molding is produced.
Required:
- What is the range of transfer prices within which both the divisions' profits would increase as a result of agreeing to the transfer of 20,000 moldings per year from the Moldings Division to the Machine Products Division?
- Is it in the best interests of Heisenberg Corporation for this transfer to take place? Explain.
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