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    Transfer pricing, Idle Capacity

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    At its Video Division, Crew Enterprises manufactures computer monitors. These can be sold internally to the EDD Division of Crew or externally to independent customers. Sales and Cost of the most pop;ar monitor is as follows:

    Per unit selling price $134.00
    Per unit variable cost 103.00
    Per unit fixed Cost* 28.00
    Full production capacity 11,000 unit per month
    Current level of production 8,500 units per month
    *based on full production capacity

    The Video Division of Crew plans to sell a maximum of 96,000 of these monitors to outside customers in the coming year. The EDD Division of Crew plans to buy 20,000 identical monitors from an outside supplier at a price of $134.00. The manager of the Video Division has offered to supply these 20,000 monitors to the EDD Division at a price of $130.00.

    A. What is the minimum transfer price for the monitor that the Video Division should be willing to accept on an internal transfer? What is the maxium price the EDD Division should be willing to pay for these monitors on an internal transfer?

    B. Suppose the manaagers of the EDD Division learn of the idle capacity at the Video Division and make an offer of $122 for these monitors. Would you expect the Video Division to accept? What would be the effect on net income for the Video Division of accepting this offer?

    C. What would be the effect on net income for Crew as a whole if the transfer price of $122 were accepted?

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    Solution Preview

    Transfer pricing, Idle Capacity

    At its Video Division, Crew Enterprises manufactures computer monitors. These can be sold internally to the EDD Division of Crew or externally to independent customers. Sales and Cost of the most popular monitor is as follows:

    Per unit selling price $134.00
    Per unit variable cost 103.00
    Per unit fixed Cost* 28.00
    Full production capacity 11,000 units per month
    Current level of production 8,500 units per month
    *based on full production capacity

    The Video Division of Crew plans to sell a maximum of 96,000 of these monitors to outside customers in the coming year. The EDD Division of Crew plans to buy 20,000 identical monitors from an outside supplier at a price of $134.00. The manager of the Video Division has offered to ...

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