Weller Industries is a decentralized organization with six divisions. The company’s Electrical Division produces a varie
Posted: Wed May 04, 2022 4:29 pm
Weller Industries is a decentralized organization with six
divisions. The company’s Electrical Division produces a variety of
electrical items, including an X52 electrical fitting. The
Electrical Division (which is operating at capacity) sells this
fitting to its regular customers for $9.60 each; the fitting has a
variable manufacturing cost of $5.11.
The company’s Brake Division has asked the Electrical Division
to supply it with a large quantity of X52 fittings for only $7.60
each. The Brake Division, which is operating at 50% of capacity,
will put the fitting into a brake unit that it will produce and
sell to a large commercial airline manufacturer. The cost of the
brake unit being built by the Brake Division follows:
Although the $7.60 price for the X52 fitting represents a
substantial discount from the regular $9.60 price, the manager of
the Brake Division believes the price concession is necessary if
his division is to get the contract for the airplane brake units.
He has heard “through the grapevine” that the airplane manufacturer
plans to reject his bid if it is more than $57 per brake unit.
Thus, if the Brake Division is forced to pay the regular $9.60
price for the X52 fitting, it will either not get the contract or
it will suffer a substantial loss at a time when it is already
operating at only 50% of capacity. The manager of the Brake
Division argues that the price concession is imperative to the
well-being of both his division and the company as a whole.
Required:
1. Assume that you are the manager of the Electrical
Division.
a. What is the lowest acceptable transfer price for
the Electrical Division?
b. Would you supply the X52 fitting to the Brake
Division for $7.60 each as requested?
2. Assuming the airplane brakes can be sold for $57, what is the
financial advantage (disadvantage) for the company as a whole (on a
per unit basis) if the Electrical Division supplies fittings to the
Brake Division?
3. In principle, within what range would the transfer price
lie?
Purchased parts (from outside vendors) Electrical fitting X52 Other variable costs Fixed overhead and administration Total cost per brake unit $ 24.60 7.60 14.87 8.90 $ 55.97
divisions. The company’s Electrical Division produces a variety of
electrical items, including an X52 electrical fitting. The
Electrical Division (which is operating at capacity) sells this
fitting to its regular customers for $9.60 each; the fitting has a
variable manufacturing cost of $5.11.
The company’s Brake Division has asked the Electrical Division
to supply it with a large quantity of X52 fittings for only $7.60
each. The Brake Division, which is operating at 50% of capacity,
will put the fitting into a brake unit that it will produce and
sell to a large commercial airline manufacturer. The cost of the
brake unit being built by the Brake Division follows:
- Weller Industries Is A Decentralized Organization With Six Divisions The Company S Electrical Division Produces A Varie 1 (59.46 KiB) Viewed 29 times
substantial discount from the regular $9.60 price, the manager of
the Brake Division believes the price concession is necessary if
his division is to get the contract for the airplane brake units.
He has heard “through the grapevine” that the airplane manufacturer
plans to reject his bid if it is more than $57 per brake unit.
Thus, if the Brake Division is forced to pay the regular $9.60
price for the X52 fitting, it will either not get the contract or
it will suffer a substantial loss at a time when it is already
operating at only 50% of capacity. The manager of the Brake
Division argues that the price concession is imperative to the
well-being of both his division and the company as a whole.
Required:
1. Assume that you are the manager of the Electrical
Division.
a. What is the lowest acceptable transfer price for
the Electrical Division?
b. Would you supply the X52 fitting to the Brake
Division for $7.60 each as requested?
2. Assuming the airplane brakes can be sold for $57, what is the
financial advantage (disadvantage) for the company as a whole (on a
per unit basis) if the Electrical Division supplies fittings to the
Brake Division?
3. In principle, within what range would the transfer price
lie?
Purchased parts (from outside vendors) Electrical fitting X52 Other variable costs Fixed overhead and administration Total cost per brake unit $ 24.60 7.60 14.87 8.90 $ 55.97