Question - The Chip Division of Pleasanton Co. has just revised its actual cost data for the year just ended. Chip Division transfers circuit boards to the Assembly Division, and incurs no selling expense for such transfers. Assembly Division can buy the same goods in the open market for $142 each. Chip's new cost data are:
Direct materials $ 60
Direct labor 30
Variable manufacturing overhead 15
Fixed manufacturing overhead 8
Variable selling expenses 6
Fixed selling and administrative expenses 12
Total costs $131
Desired return 20
Sales price $151
Current production is 400,000 units, and Chip has a capacity of 600,000 units.
a. What is the lowest price Chip should charge for the internal transfer of its goods?
b. What is the highest price Assembly should pay Chip for the units?
c. Give the primary reason why Chip should reduce its price for internal transfers below the market price.