Folk Company's Audio Division (AD) produces a speaker used by manufacturers of various audio products. Sales and cost data on the speaker are as follows:
Selling price per unit to external customers $60
Variable manufacturing costs per unit $40
Fixed overhead per unit (based on capacity) $ 2
Variable selling costs per unit $ 2
Fixed selling and administrative costs per unit $ 8
Total capacity 25,000 units
The Home Theatre Division (HTD) of Folk Company could use this speaker in one of its products. They require 5,000 speakers per year and are currently paying $57 per speaker from an external supplier. Selling costs are not incurred on internal transfers.
1. Assuming the AD is currently selling 20,000 speakers per year to external customers, what would be the overall effect on company profits if they were to sell 5,000 speakers per year to the HTD?
2. At what transfer price would the overall gain or loss to the company calculated in part 1 above, be equally shared by the two divisions?