The machining division has a capacity of 4,000 units. Its sales and cost data are:
Selling price per unit...........................................$160
Variable manufacturing costs per unit..........................50
Variable selling costs per unit....................................10
Total fixed manufacturing overhead.....................100,000
Instructions
(a) The machining division currently sells 1,600 units to outside customers, and the assembly division wants to purchase 800 units from machining. If the transaction takes place, the variable selling costs per unit on the units transferred to assembly will be $0/unit, not $10/unit. What should be the transfer price in order not to affect its current profit?
(b) If the assembly division is currently buying from an outside supplier at $150 per unit, what will be the effect on overall company profits if internal sales for 800 units take place at the optimum transfer price?