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Courtland Company has a decentralized organization with a divisional structure. Each divisional manager is evaluated on the basis of ROI.
The Plastics Division produces a plastic container that the Chemical Division can use. Plastics can produce up to 100,000 of these containers per year. The variable costs of manufacturing the plastic containers are $4.50. The Chemical Division labels the plastic containers and uses them to store an important industrial chemical, which is sold to outside customers for $50 per container. The division’s capacity is 20,000 units. The variable costs of processing the chemical (in addition to the cost of the container itself) are $26.
REQUIRED
(Assume each requirement is independent, unless otherwise indicated.)
1. Assume that all of the plastic containers produced can be sold to external customers for $12 each. The Chemical Division wants to buy 20,000 containers per year. What should the transfer price be? Briefly explain. (2 marks)
2. Refer to Requirement 1. Assume $2 of avoidable distribution costs if sold internally. Identify the maximum and minimum transfer prices. Identify the actual transfer price, assuming that negotiation evenly splits the sum of the maximum and minimum transfer prices.
2 answers
Courtland Company has a decentralized organization with a divisional structure. Each divisional manager is evaluated on the basis of ROI.
The Plastics Division produces a plastic container that the Chemical Division can use. Plastics can produce up to 100,000 of these containers per year. The variable costs of manufacturing the plastic containers are $4.50. The Chemical Division labels the plastic containers and uses them to store an important industrial chemical, which is sold to outside customers for $50 per container. The division’s capacity is 20,000 units. The variable costs of processing the chemical (in addition to the cost of the container itself) are $26.
REQUIRED
(Assume each requirement is independent, unless otherwise indicated.)
1. Assume that all of the plastic containers produced can be sold to external customers for $12 each. The Chemical Division wants to buy 20,000 containers per year. What should the transfer price be? Briefly explain.
2. Refer to Requirement 1. Assume $2 of avoidable distribution costs if sold internally. Identify the maximum and minimum transfer prices. Identify the actual transfer price, assuming that negotiation evenly splits the sum of the maximum and minimum transfer prices.
3. Assume that the Plastics Division is operating at 75 percent of capacity. The Chemical Division is currently buying 20,000 containers from an outside supplier for $9.50 each. Assume that any joint benefit will be split evenly between the two divisions. What is the expected transfer price? How much will the profits of the firm increase under this arrangement? How much will the profits of the Plastics Division increase, assuming that it sells the extra 20,000 containers internally?
4. Assume that both divisions have excess capacity. Currently, a total of 15,000 containers is being transferred between divisions at a price of $8. The Chemical Division has an opportunity to take a special order for 5,000 containers of chemical at a price of $33.75 per container. The manager of the Chemical Division approached the manager of the Plastics and offered to buy an additional 5,000 plastic container for $5 each. Assuming that the Plastics Division has excess capacity totaling at least 5,000 units, should the manager take the offer? What is the minimum transfer price? The maximum transfer price? Assume that the Plastics Division manager counters with a price of $5.50. Would the Chemical Division manager be interested?
The Plastics Division produces a plastic container that the Chemical Division can use. Plastics can produce up to 100,000 of these containers per year. The variable costs of manufacturing the plastic containers are $4.50. The Chemical Division labels the plastic containers and uses them to store an important industrial chemical, which is sold to outside customers for $50 per container. The division’s capacity is 20,000 units. The variable costs of processing the chemical (in addition to the cost of the container itself) are $26.
REQUIRED
(Assume each requirement is independent, unless otherwise indicated.)
1. Assume that all of the plastic containers produced can be sold to external customers for $12 each. The Chemical Division wants to buy 20,000 containers per year. What should the transfer price be? Briefly explain.
2. Refer to Requirement 1. Assume $2 of avoidable distribution costs if sold internally. Identify the maximum and minimum transfer prices. Identify the actual transfer price, assuming that negotiation evenly splits the sum of the maximum and minimum transfer prices.
3. Assume that the Plastics Division is operating at 75 percent of capacity. The Chemical Division is currently buying 20,000 containers from an outside supplier for $9.50 each. Assume that any joint benefit will be split evenly between the two divisions. What is the expected transfer price? How much will the profits of the firm increase under this arrangement? How much will the profits of the Plastics Division increase, assuming that it sells the extra 20,000 containers internally?
4. Assume that both divisions have excess capacity. Currently, a total of 15,000 containers is being transferred between divisions at a price of $8. The Chemical Division has an opportunity to take a special order for 5,000 containers of chemical at a price of $33.75 per container. The manager of the Chemical Division approached the manager of the Plastics and offered to buy an additional 5,000 plastic container for $5 each. Assuming that the Plastics Division has excess capacity totaling at least 5,000 units, should the manager take the offer? What is the minimum transfer price? The maximum transfer price? Assume that the Plastics Division manager counters with a price of $5.50. Would the Chemical Division manager be interested?
1 answer