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Asked by Heather Weathers on Jul 24, 2024

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Starcic Products, Incorporated, has a Connector Division that manufactures and sells a number of products, including a standard connector. Data concerning that connector appear below:
Starcic Products, Incorporated, has a Connector Division that manufactures and sells a number of products, including a standard connector. Data concerning that connector appear below: The company has a Transmission Division that needs 6,000 special heavy-duty connectors per year. The Connector Division's variable cost to manufacture and ship this special connector would be $62 per unit. Making these special connectors would require more manufacturing resources. Therefore, the Connector Division would have to reduce its production and sales of regular connectors to outside customers from 45,000 units per year to 38,400 units per year. Required: As far as the Connector Division is concerned, what is the lowest acceptable transfer price for the special connectors? The company has a Transmission Division that needs 6,000 special heavy-duty connectors per year. The Connector Division's variable cost to manufacture and ship this special connector would be $62 per unit. Making these special connectors would require more manufacturing resources. Therefore, the Connector Division would have to reduce its production and sales of regular connectors to outside customers from 45,000 units per year to 38,400 units per year.
Required:
As far as the Connector Division is concerned, what is the lowest acceptable transfer price for the special connectors?

Transfer Price

The cost at which products or services are exchanged between divisions within the same organization or among affiliated companies.

Transmission Division

A segment within a company or industry that specializes in the development, production, and maintenance of transmission systems.

  • Digest and detail the fundamentals of transfer pricing and the legally acceptable price ranges within a corporate infrastructure.
  • Evaluate the bearing of restricted operational capacity on the manufacturing and pricing strategies of a corporation.
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DS
Deeep SinghhJul 26, 2024
Final Answer :
To produce the 6,000 special connectors, the Connector Division will have to give up sales of 6,600 of the regular connectors to outside customers.
To produce the 6,000 special connectors, the Connector Division will have to give up sales of 6,600 of the regular connectors to outside customers. From the perspective of the selling division, profits would increase as a result of the transfer if and only if: Transfer price > Variable cost per unit + (Total contribution margin on lost sales ÷ Number of units transferred) Transfer price > $62.00 per unit + ($191,400 ÷ 6,000 units) = $62.00 per unit + $31.90 per unit = $93.90 per unit
From the perspective of the selling division, profits would increase as a result of the transfer if and only if:
Transfer price > Variable cost per unit + (Total contribution margin on lost sales ÷ Number of units transferred)
Transfer price > $62.00 per unit + ($191,400 ÷ 6,000 units) = $62.00 per unit + $31.90 per unit = $93.90 per unit

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