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Assume two divisions of a company, P (producing) and B (buying), that are treated as investment centres for
performance-evaluation purposes. P division produces a product that can be used by B division. P division’s product manufacturing cost is $100.00 per unit (including $20 fixed manufacturing cost per unit). Division P can sell its output externally for $120.00 per unit and incurs a sales commission charge of $5.00 per unit. Currently, Division B can purchase the product from an external supplier at $120.00 per unit plus a $3.00 transportation charge per unit. Division B incurs $20 further processing cost and sells the final product for $190 on the external market. Division B also incurs a variable selling cost of $10 per unit.
Required: Answer each of the following independent questions.
(i) Determine whether the transfer is profitable for the company. Assume that division P sells all products to outside customers. Show your calculations.
(ii) Determine the minimum and maximum transfer prices if division P sells all products to outside customers. Describe the likely reactions of divisional managers towards the transfer. Show your calculations.
(iii) Determine the minimum and maximum transfer prices if P division currently has sufficient spare capacity to transfer the quantity required by B division. Describe the likely reactions of divisional managers towards the transfer. Show your calculations.
(iv) Determine the minimum and maximum transfer prices if P division has enough spare capacity to transfer the units required by B division and there is no external market for its product. Describe the likely reactions of divisional managers towards the transfer. Show your calculations.
This is my past exam question and i need understand it for my final exam. Part of transfer price make me confuse. Can some one answer for this question and I’d like you to show me the intermediate expression.
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