Question : 147. One of the divisions of Phoenix Corporation the Motor Division. : 1208314

 

147. One of the divisions of Phoenix Corporation is the Motor Division. This division currently is designing a new, energy-efficient motor that would require a specialized filter. An outside company has offered to provide the 40,000 filters needed each year at $25 each. Phoenix is considering setting up a separate division, the Filter Division, to make the filters. The variable cost per unit would be $8, and total fixed costs incurred by the Filter Division would be $480,000.
Required:
1) If the Filter Division is established, Phoenix would need to determine the basis (market-based or other basis) to use in setting the transfer price. What basis would you recommend in this case?
2) What is the maximum transfer price that the Motor Division should be willing to pay for the filters?
3) What is the minimum transfer price that Filter Division should be willing to accept for the filters?
4) Should the transfer be made? What effect would the transfer have on the profits of Phoenix Corporation?

148. One of the divisions in Miller Manufacturing Company is the Motor Division. The Motor Division is developing a new product that would require a filter not commercially available. Motor Division believes it can sell 40,000 units of the new product each year at a selling price of $60. Variable costs for the new product would be $30, not including the filter, and there will be $80,000 of incremental fixed costs associated with the product. The Motor Division does not have the expertise to make the filters. Miller Manufacturing Company has a Filter Division that could make the filters and has sufficient idle capacity. It estimates the variable cost per unit would be $8 and incremental fixed costs would be $60,000 each year.
Required:
1) There are different bases that can be used in setting transfer prices, including market prices. What basis should be used in this situation?
2) What is the maximum transfer price Motor Division should be willing to pay? Note that, without the filters, the Motor Division cannot make and sell its new product.
3) What is the minimum transfer price that Filter Division should be willing to accept?
4) Should the transfer be made? If not – why not? If so – what transfer price (or range of transfer prices) would you recommend?

149. Hansen Company is a decentralized company that has two divisions, Division A and Division B. Division A has the capacity to manufacture 24,000 units of a product that could be used by Division B. Division A currently is selling 16,000 units of the product to customers outside the company, incurring the following costs: variable costs of $14 per unit and total fixed costs of $96,000. The selling price to these customers is $32 per unit.
Division B needs 4,000 units of the product that Division A makes. It currently is purchasing the units from an outside supplier at a price of $30 each. Division B offers to purchase the units from Division A at a price of $24; the managers of Division A say the price must be at least $28. The managers of the two divisions appear to have reached a stalemate, which threatens to prevent the transfer from occurring within the company.
Required:
1) Is it in the best interest of Hansen Company for Division B to purchase the units from Division A? Show quantitative support for your answer.
2) If the transfer is in the best interest of the company as a whole, should the top managers of Hansen Company order the division managers to come to terms? How might the top management of Hansen handle the situation other than by ordering the division managers to make the transfer?

 

 

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