Problem
The Newman Parts Division of Young Company plans to set up a facility with the capacity to make 9,300 units annually of a webcam for laptop computers. The avoidable cost of making the webcam is as follows.
|
Costs
|
Total
|
Cost per Unit
|
|
Variable cost
|
$
|
269,700
|
|
$
|
29.00
|
|
|
Fixed cost
|
|
71,610
|
|
|
7.70
|
(at capacity)
|
Required:
a-1. Assume that Young's Austen Division is currently purchasing 5,600 of the same type of webcam each year from an outside supplier at a market price of $51.80. What would be the financial consequence to Young if the Newman Parts Division makes the webcam and sells it to the Austen Division?
a-2. What is the minimum and maximum range of transfer price?
b. Suppose that the Austen Division increases production so that it could use 9,300 webcams made by the Newman Parts Division. How would the change in volume affect the range of transfer prices that would financially benefit both divisions?