Division X Has Asked Division K of the Same Company

Essay

Division X has asked Division K of the same company to supply it with 5,000 units of part L433 this year to use in one of its products.Division X has received a bid from an outside supplier for the parts at a price of $26.00 per unit.Division K has the capacity to produce 30,000 units of part L433 per year.Division K expects to sell 26,000 units of part L433 to outside customers this year at a price of $30.00 per unit.To fill the order from Division X,Division K would have to cut back its sales to outside customers.Division K produces part L433 at a variable cost of $21.00 per unit.The cost of packing and shipping the parts for outside customers is $2.00 per unit.These packing and shipping costs would not have to be incurred on sales of the parts to Division X.
Required:
a.What is the range of transfer prices within which both the Divisions' profits would increase as a result of agreeing to the transfer of 5,000 parts this year from Division X to Division K?
b.Is it in the best interests of the overall company for this transfer to take place? Explain.
(Note: Due limitations in fonts and word processing software,> and < signs must be used in this solution rather than "greater than or equal to" and "less than or equal to" signs. )