Problem:
HealthPharma has two divisions, A and B. Each division is operated as a profit center. Division A makes a specialized product used by Division B. Division A currently charges division B $35 per unit for each unit transferred to division B. B can resell the item for $120 each after spending incremental costs of $65 per unit.
A's incremental cost per unit $30
A's fixed costs $100,000 (assume all of these fixed costs are unavoidable)
A's annual sales to B 10,000 units
A's sales to external buyers 50,000 units at $50 per unit
A's capacity - 60,000 units
A is planning to raise its internal transfer price to their external market price of $50 per unit. Division B can purchase comparable units for $40 each from external suppliers but Division A cannot increase its sales to external buyers if Division B purchases externally.
1. What would be the difference in profit for Division B if they are forced by senior management of HealthPharma to accept this internal order at a price of $50 per unit rather than purchasing the unit externally?
2. What will be the incremental change in profit for HealthPharma as a whole if the internal transfer takes place at a price of $50 per unit compared to if Division B purchases externally?
3. Would the president of HealthPharma want an internal transfer to take place (Yes or No)?
4. What is the minimum transfer price that Division A should accept for the order of 10,000 units from Division B?
5. If Division A's capacity was only 50,000 units rather than 60,000 units, what effect would transferring 10,000 units internally at a price of $35 per unit have on the profits of HealthPharma Corporation as a whole compared to if no internal transfer took place?