Case Anlaysis

Problem 8:

Floor Covering Division of Queen Home Inc. manufactures a single grade of residential grade
carpeting. The division has the capacity to produce 500,000 sq. yards of carpet each year. Its
current cost and revenues are shown here:

Sales (400,000 square yards) P 2,000,000

Variable cost per square yard:
Production P 2.00
SG&A 1.00
Fixed cost per square yard (based on 500,000 yard capacity)
Production P 0.50
SG&A 1.00

The Building Division currently purchases 40,000 yards of carpeting (of the grade produced by
Floor Covering Division) each year at a cost of P6.50 per square yard from an outside vendor.

REQUIRED:

1. If the autonomous Building and Floor Covering Divisions enter negotiations on the
internal transfer of 40,000 square yards of carpeting, what is the maximum price that will
be considered?
2. If the autonomous Building and Floor Covering Divisions enter negotiations on the
internal transfer of 40,000 square yards of carpeting, what is the Floor Covering
Division’s minimum price?
3. If the Building and Floor Covering Divisions agree on the internal transfer of 40,000
square yards of carpet at a price of P4.50per square yard, how will the profits of the
Building Division be affected?
4. If the Building and Floor Covering Division agree on the internal transfer of 40,000
square yards of carpet at a price of P4.00per square yard, how will overall corporate
profits be affected?
5. Assume, for this question only, that the Floor Covering Division is producing and selling
500,000 square yards of carpet to external buyers at a price of P5 per square yard. What
would be the effect on overall corporate profits if the Floor Covering Division reduces
external sales of carpet by 40,000 square yards and transfers the 40,000 square yards
of carpet to the Building Division?

Problem 9:
King’s Company’s Audio Division produces a speaker that is widely used by manufacturers of
various audio products.
Sales and cost data on the speaker follow:
Selling price per unit on the intermediate market P60
Variable cost per unit 42
Fixed costs per unit 8
Capacity in units 25,000

King Company has just organized a Hi-Fi Division that could use this speaker in one of its
products. The Hi-Fi Division will need 5,000 speakers per year. It has received a quote of P57
per speaker from another manufacturer. King Company evaluates divisional managers on the
basis of divisional profits.

Assume that the Audio Division is now selling only 20,000 speakers per year to outside
customers on the intermediate market.
1. From the standpoint of the Audio Division, what is the lowest acceptable transfer price
for speakers sold to the Hi-Fi Division?
2. From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price
for speakers purchased from the Audio Division?
3. If left free to negotiate without interference,would you expect the division managers to
voluntarily agree to the transfer of 5,000 speakers from the Audio Division to the Hi-Fi
Division? Why or why not?
4. From the standpoint of the entire company, should the transfer take place? Why or why
not?

Problem 10:

TND Corporation comprises two divisions: T and D. T currently produces and sells a gear
assembly used by the automotive industry in electric window assemblies. D is currently selling
all of the units it can produce (25,000 per year) to external customers for P25 per unit. At this
level of activity, T’s per unit costs are:

Variable:
Production P7
SG&A 2
Fixed:
Production 6
SG&A 5

D Division wants to purchase 5,000 gear assemblies per year from T Division. D Division
currently purchases these units from an outside vendor at P22 each.
1. What is the minimum price per unit that T Division could accept from D Division for 5,000
units of the gear assembly and be no worse off than currently?
 2. What will be the effect on overall corporate profits if the two divisions agree to an internal
transfer of 5,000 units?

Problem 11:

GreenMision, Inc., is a nursery products firm. It has three divisions that grow and sell plants:
the Northern Division, the Central Division, and the Southern Division.
Recently, the Central Division of GreenMision acquired a plastics factory that manufactures
green plastic pots. These pots can be sold both externally and internally. Company policy
permits each manager to decide whether to buy or sell internally. Each divisional manager is
evaluated on the basis of return on investment and EVA.
The Northern Division had bought its plastic pots in lots of 100 from a variety of vendors. The
average price paid was P75 per box of 100 pots. However, the acquisition made Gina Linetti,
manager of the Northern Division, wonder whether a more favorable price could be arranged.
She decided to approachJacobPeralta, manager of the Central Division, to see if he wanted to
offer a better price for an internal transfer. She suggested a transfer of 3,500 boxes at P70 per
box.
Jacob gathered the following information regarding the cost of a box of 100 pots:

Direct materials P35

Direct labor 8
Variable overhead 10
Fixed overhead* 10
Total unit cost P63
Selling price P75
Production capacity 20,000 boxes

REQUIRED:

1. Suppose that the plastics factory is producing at capacity and can sell all that it produces
to outside customers. How should Jacob respond to Gina’s request for a lower transfer
price?
2. Now assume that the plastics factory is currently selling 16,000 boxes. What are the
minimum and maximum transfer prices? Should Jacob consider the transfer at P70 per
box?
3. Suppose that Green Mission's policy is that all transfer prices be set at full cost plus 20
percent. Would the transfer take place? Why or why not?

Multiple Choice

Questions 15 -17
The Motor Division of Lucky Truck Co. uses 5,000 carburetors per month in its production of
automotive engines. It presently buys all of the carburetors it needs from two outside suppliers
at an average cost of P100. The Carburetor Division of Lucky Truck Co. manufactures the exact
type of carburetor that the Motor Division requires. The Carburetor Division is presently
operating at its capacity of 15,000 units per month and sells all of its output to a foreign car
manufacturer at P106 per unit. Its cost structure (on 15,000 units) is:
Variable production costs P70
Variable selling costs 10
All fixed costs 10

Assume that the Carburetor Division would not incur any variable selling costs on units that are
transferred internally.

15. What is the maximum of the transfer price range for a transfer between the two divisions?
a. P106
b. P100
c. P90
d. P70

16. What is the minimum of the transfer price range for a transfer between the two divisions?
a. P96
b. P90
c. P70
d. P106

17. If the two divisions agree to transact with one another, corporate profits will
a. drop by P30,000 per month.
b. rise by P20,000 per month.
c. rise by P50,000 per month.
d. rise or fall by an amount that depends on the level of the transfer price.

Questions for 18 - 22

Jeb’s Office Inc. manufactures and sells various high-tech office automation products. Two
divisions of Jeb’s Office Inc. are the Integrated Division and the Computer Division. The
Integrated Division manufactures one product, a “super chip,” that can be used by both the
Computer Division and other external customers. The following information is available on
this month’s operations in the Integrated Division:
Selling price per chip P50
Variable costs per chip P20
Fixed production costs P60,000
Fixed SG&A costs P90,000
Monthly capacity 10,000 chips
External sales 6,000 chips
Internal sales 0 chips

Presently the Computer Division purchases no chips from the Integrated Division, but
instead pays P45 to an external supplier for the 4,000 chips it needs each month.

18. Assume that next month’s costs and levels of operations in the Computer and Integrated
Divisions are similar to this month. What is the minimum of the transfer price
range for a possible transfer of the super chip from one division to the other?
a. P50
b. P45
c. P20
d. P35

19. Assume that next month’s costs and levels of operations in the Computer and Integrated
Divisions are similar to this month. What is the maximum of the transfer price
range for a possible transfer of the chip from one division to the other?
a. P50
b. P45
c. P35
d. P30

20. Two possible transfer prices (for 4,000 units) are under consideration by the two
divisions: P35 and P40. Corporate profits would be ___________ if P35 is selected as the
transfer price rather than P40.
a. P20,000 larger
b. P40,000 larger
c. P20,000 smaller
d. the same

21. If a transfer between the two divisions is arranged next period at a price (on 4,000 units of
super chips) of P40, total profits in the Integrated division will
a. rise by P20,000 compared to the prior period.
b. drop by P40,000 compared to the prior period.
c. drop by P20,000 compared to the prior period.
d. rise by P80,000 compared to the prior period.

22. Assume, for this question only, that the Integrated Division is selling all that it can
produce to external buyers for P50 per unit. How would overall corporate profits be
affected if it sells 4,000 units to the Computer Division at P45? (Assume that the Computer
Division can purchase the super chip from an outside supplier for P45.)
a. no effect
b. P20,000 increase
c. P20,000 decrease
d. P90,000 increase