Problem:
At its Video Division, MCrew Entertainment manufactures computer monitors. These can be sold internally to the EDD Division of MCrew or externally to independent customers. Sales and costs of the most popular monitor are as follows:
Per unit selling price $134.00
Per unit variable cost $103.00
Per unit fixed costs* $28.00
Full production capacity 11,000 units per month
Current level of production 8,500 units per month
*Based on full production capacity
The Video Division of MCrew plans to sell a maximum of 96,000 of these monitors to outside customers in the coming year. The EDD Division of MCrew plans to buy 20,000 identical monitors from an outside supplier at a price of $134. The manager of the Video Division has offered to supply these 20,000 monitors to the EDD Division at a price of $130.
Q1. What is the minimum transfer price for the monitor that the Video Division should be willing to accept on an internal transfer? What is the maximum price the EDD division should be willing to pay for these monitors on an internal transfer?
Q2. Suppose the managers of the EDD Division learn of the idle capacity at the Video Division and make an offer of $122 for these monitors. Would you expect the Video Division to accept? What would be the effect on net income for the Video Division of accepting this offer?
Q3. What would be the effect on net income for MCrew as a whole if the transfer price of $122 were accepted?