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Liberaki SA has two divisions, A and B, which manufacture bicycles. Division A produces the bicycle frame, and Division B assembles the bicycle components onto the frame. There is a market for both the subassembly and the final product. Each division has been desig- nated as a profit centre. The transfer price for the subassembly has been set at the long-run average market price. The following data are available to each division:
Estimated selling price for final product |
€300 |
Long-run average selling price for intermediate product |
200 |
Incremental costs for completion in Division B |
150 |
Incremental costs in Division A |
120 |
The manager of Division B has made the following calculation:
Selling price for final product €300
Transferred-in costs (market) €200
_{Incremental }_{costs }_{for }_{completion }_{150 }_{350}
_{–––– }_{– }_{–––––}
_{Contribution }_{(loss) }_{on }_{product }_{€ }_{(50)}
–––––
Required
1 Should transfers be made to Division B if there is no excess capacity in Division A? Is the market price the correct transfer price?
2 Assume that Division A’s maximum capacity for this product is 1000 units per month and sales to the intermediate market are now 800 units. Should 200 units be transferred to Division B? At what transfer price? Assume that for a variety of reasons, A will main- tain the €200 selling price indefinitely; that is, A is not considering lowering the price to outsiders even if idle capacity exists.
3 Suppose Division A quoted a transfer price of €150 for up to 200 units. What would be the contribution to the company as a whole if the transfer were made? As manager of Division B, would you be inclined to buy at €150?
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