Maxim produces kitchen tools, and operates several divisions as profit centers. North Division produces a product that it sells to other companies for $16 per unit. It is currently operating at its full capacity of 45,000 units per year. Variable manufacturing cost is $9 per unit, and variable marketing cost is $3 per unit.
The company wishes to create a new division, South Division, to produce an innovative new tool that requires the use of North Division's product (or one very similar). South Division will produce 30,000 units. Currently, South Division can purchase a product equivalent to North Division's from Company X for $15 per unit. However, Maxim is considering transferring the necessary product from North Division.
Required
- What are the maximum and minimum transfer prices here?
- Assume the transfer price is $12 per unit. How would this affect the purchasing costs of South Division? How would this affect the profits of North Division? How would this affect Maxim as a whole?
- What if the transfer price was $13 per unit?
Make or Buy Decision
Gladiator Corporation, a high-end digital camera manufacturer, currently purchases lenses from an outside company at a price of $237 per unit. While the quality of the lenses has always been very high, Gladiator's management believes it might be possible to produce a superior lens internally at a cost lower than $237. The accounting department has provided the following estimate of a per-unit manufacturing cost for the lens:
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Direct materials
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$88
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Direct labor
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$81
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Variable overhead
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$37
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Fixed overhead allocation
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$90
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Total per unit
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$296
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The company's controller believes that the estimate may be incorrect because the corporation has excess manufacturing space and will not incur additional fixed overhead if they produce the lenses.
Required
- Should the company make the lenses or continue to buy them? Show supporting calculations, including savings/loss if they need 15,000 lenses.
- What qualitative issues should the company consider in making this decision?