Question - Assume the Small Components Division of Swisher Manufacturing produces a video card used in the assembly of a variety of electronic products. The division's manufacturing costs and variable selling expenses related to the video card are as follows:
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Cost per unit
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Direct materials
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$14.00
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Direct labor
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$9.00
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Variable manufacturing overhead
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$5.00
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Fixed manufacturing overhead (at current production level)
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$7.00
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Variable selling expenses
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$10.00
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The Computer Division of Swisher Manufacturing can use the video card produced by the Small Components Division and is interested in purchasing the video card in-house rather than buying it from an outside supplier. The Small Components Division has sufficient excess capacity with which to make the extra video cards. Because of competition, the market price for this video card is $32 regardless of whether the video card is produced by Swisher Manufacturing or another company.
a) What is the highest acceptable transfer price for divisions?
b) Assuming the transfer price is negotiated between the divisions of the company, what would be the lowest acceptable transfer price? (What is the equation?)
c) Which transfer price would the manager of the Small Components division prefer? Which transfer price would the manager of the Computer Division prefer? (What are their prices?)
d) If the company's policy requires that all in-house transfers be priced at full absorption cost plus 2%, what transfer price would be used? Assume that increased production level needed to fill the transfer would result in fixed manufacturing overhead decreasing by $1.00 per unit. (What is the formula to compute the transfer price under this strategy?) (What is the price?)
e) If the company's policy requires that all in-house transfers must be priced at total manufacturing variable cost plus 18%, what transfer price would be used? Assume the company does not consider fixed manufacturing overhead in setting its internal transfer price in this scenario. (What is the formula to compute the transfer price under this strategy?) (What is the price?)
f) Assume now that the company does incur the variable selling expenses on internal transfers. If the company policy is to set transfer prices at 109% of the sum of the full absorption cost and the variable selling expenses, what transfer price be set at? Assume that the fixed manufacturing overhead would drop by $1.00 per unit as a result of the increased production resulting from the internal transfers. (What is the formula to compute the transfer price under this strategy?) (What is the price?)