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E8-16 Crede Inc. has two divisions

Price: $1.99


E8-16 Crede Inc. has two divisions. Division A makes and sells student desks. Division B
manufactures and sells reading lamps.
Each desk has a reading lamp as one of its components. Division A can purchase reading
lamps at a cost of $10 from an outside vendor. Division A needs 10,000 lamps for the
coming year.

Division B has the capacity to manufacture 50,000 lamps annually. Sales to outside customers
are estimated at 40,000 lamps for the next year. Reading lamps are sold at $12 each.
Variable costs are $7 per lamp and include $1 of variable sales costs that are not incurred
if lamps are sold internally to Division A. The total amount of fixed costs for Division B is
$80,000.

Instructions
Consider the following independent situations.
(a) What should be the minimum transfer price accepted by Division B for the 10,000
lamps and the maximum transfer price paid by Division A?
(b) Suppose Division B could use the excess capacity to produce and sell externally 15,000
units of a new product at a price of $7 per unit. The variable cost for this new product is
$5 per unit. What should be the minimum transfer price accepted by Division B for the
10,000 lamps and the maximum transfer price paid by Division A?

(c) If Division A needs 15,000 lamps instead of 10,000 during the next year, what should
be the minimum transfer price accepted by Division B and the maximum transfer
price paid by Division A?

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