Question:
Motchip Division, a decentralized plant of Pazazz Motor Company, is considering what transfer price to charge the Engine Division for transfers of computer chips to that division. The following data on production cost per computer chip have been gathered:
|
Direct material
|
$1.50
|
|
Direct labor
|
4
|
|
Variable overhead
|
1.7
|
|
Fixed overhead
|
2.4
|
|
Total
|
$9.60
|
The Motchip Division sells the computer chips to external buyers for $21.75. Managers of the Engine Division have received external offers to provide the division comparable chips, ranging from $15 at one company to $23 at another.
a. Determine the upper and lower limits for the transfer price between the Motchip Division and the Engine Division.
b. If the Motchip Division is presently selling all the chips it can produce to external buyers, what is the minimum price it should set for transfers to the Engine Division?