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ACC - The Whole Company

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Question;The Whole Company is an integrated multidivisional manufacturing firm. Two ofits divisions, Rod and Champ. are profit centres and their division managers havefull responsibility for production and sales (both internal and external). Both theRod and Champ division managers are evaluated by top management on thebasis of total profit.Rod Division is the exclusive producer of a special equipment component calledQ-32. Since there is no outside competition for Q-32. the Rod division managerused the results of a market study together with statistical probability analysis toset the price at $450 per unit of Q-32. At this price, the normal sales andproduction volume is 21,000 units per year, however, production capacity is26,000 units per year. Standard production costs for one unit of Q-32 based onnormal production volume are as follows:Direct materialsDirect laborVariable overheadFixed overheadTotal unit production costs$175.0075.0050.0090.00$390.00Champ Division produces machinery for several large customers on acontractual basis. It has recently been approached by a potential customer toproduce a specially designed machine that requires one unit of Q-32 as its maincomponent. The potential customer has indicated that it would be willing to sign along-term contract for 10,400 units of the machine per year at a maximum priceof $650 per unit. Although Champ Division has sufficient idle capacity toaccommodate the production of this special machine, the division manager is notwilling to accept the contract unless he can negotiate a reasonable transfer pricewith the Rod division manager for Q-32. He has calculated that the unit costs toproduce thespecial machine are as follows:Direct material other than Q-32Direct laborVariable overheadFixed overheadTotal unit production costs before transfer of Q-32$100.0050.0035.0050.00$235.00REQUIRED:a) What is the maximum unit transfer price that the Champ division managershould be willing to accept for Q-32 if he wishes to accept the contract forthe special machine? Support your answer.b) What is the minimum unit transfer price that the Rod division managershould be willing to accept for Q-32? Support your answer.c) Assume that Rod Division would be able to sell its capacity of 26,000 unitsof Q-32 per year in the outside market if the selling price was reduced by5%. From top management's point of view, evaluate consideringquantitative factors, whether Rod Division should lower its market price ortransfer the required units of Q-32 to Champ Division.

 

Paper#39054 | Written in 18-Jul-2015

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