Question :
Rapid Industries has multiple divisions. Iron Products, One division makes a component that another division, Austin, is presently purchasing on the open market. Iron Products presently has a capacity to produce 505,000 components at a variable cost of $7.00 and a complete cost of $10.00. Iron Products has outside sales of 461,000 components at a price of $14.50 per unit. Austin presently purchases 50,000 units from an outside supplier at a price of $11.00 per unit. Suppose that Austin desires to use a single supplier for its component.
a. Evaluate the effect on Rapid Industries' operating profit if the transfer is made internally? Consider the 50,000 units Austin requires are either purchased 100% internally or 100% externally.
b. Determine the minimum transfer price?
c. Evaluate the maximum transfer price?