United Propulsion Products, Inc. based in Stamford, CT has two operating plants: Component Fabrication and Component Assembly to manufacture their products for the private jet industry. The Component Fabrication monthly full capacity production is 10,400 units and sells these products for $78 per component. Production generates variable costs per unit of $28.60 and monthly fixed costs for depreciation, amortization, salaries, leases, etc. of $97,500. This generates approximately a 51% operating margin for the Fabrication operations. Component Assembly can acquire units from Fabrication for a Transfer Price of $78.00 plus $5.20 freight costs. Alternatively, it can purchase necessary units from an independent 3rd party supplier for $80.60 per unit. Analyze the financial considerations in Part A if Fabrication is operating at 100% capacity. Analyze the financial considerations in Part B if Fabrication is operating at 70% capacity and can meets Assembly's needs. 2 Acquision Cost Transfer Transportation Division Component Fabrication Component Assembly Offers Variable Cost 78.00 $ 28.60 $ Fixed Cost 97,500 Production 10,400 $ $ 80.60 $ 78.00 $ 5.20 5 6 Part A - Full Capacity Production Level Component Fabrication Component Assembly Corporate Level 7 Full Capacity 8 Transfer internally 9 Pays 10 11 12 Pays 13 14 Optimal to transfer ??? 15 16 17 18 19 Idle Capacity 20 Transfer internally Part B - Idle Capacity Production Level - Sufficient to Cover Assembly Needs Component Assembly Component Fabrication Corporate Level Pays 21 22 23 24 Sell externally 25 26 Optimal to transfer ??? Pays