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Managerial Cost using EOQ and transfer pricing

Calculate the EOQ if the company is expecting to sell 5,000 units, has a $2 per unit carrying cost, and has a cost of $10 per order. Why should you not use the EOQ without additional consideration in "real life" situations?

If a company is considering buying a new machine for $100,000 that should reduce costs by $80,000 in one year and $50,000 in second year, should they do it if they have a cost of capital of 10%?

A company faces a tax rate of 40% with their division in NZ and a tax rate of 25% in the US. They make and sell 1,000 units. It costs $125 per unit to produce the units in NZ and they can sell them for $300 each in the US.
What transfer price (between $0 and $300) would provide the greatest overall profit? Explain or show.
What transfer price (between $0 and $300) would result in the lowest overall profit?
Explain or show.
Calculate the profit if the transfer price is set at $140 per unit.

Solution Preview

Please see the attached excel file too.

Calculate the EOQ if the company is expecting to sell 5,000 units, has a $2 per unit carrying cost, and has a cost of $10 per order. Why should you not use the EOQ without additional consideration in "real life" situations? 

EOQ= Square root of ((2DS)/H)
D= Annual demand= 5000
S= ordering cost per order=$10
H= Holding cost perunit= $2
EOQ= Q= 224

We should not use EOQ without considering real life situation as EOQ model works on following assumptions:

1) There ...

Solution Summary

Solution discusses the Managerial Cost using EOQ and transfer pricing

$2.19