Kessler Enterprises manufactures computer monitors in its Video Division

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Description

Kessler
Enterprises manufactures computer monitors in its Video Division. These
monitors can be sold internally to the EDD Division of Kessler or externally to
independent customers. Sales and costs for the most popular monitor
manufactured by the Video Division are as follows.

Per unit Selling Price $135

Per unit Variable Cost $102

Per unit Fixed Cost
[based on full

production capacity] $
28

Full monthly production
capacity 10,000 units

A. The Video Division of Kessler plans to sell
96,000 of these monitors to outside customers in the coming year. The EDD
Division of Kessler needs and has been buying 20,000 identical monitors per
year from an outside supplier at a price of $135.

  1. What is the minimum transfer price for
    the monitor that the Video Division should be willing to accept on an
    internal transfer?

  1. What is the maximum transfer price the
    EDD Division should be willing to pay for these monitors?

  1. If the two divisions agree to a
    transfer price of $125 per monitor, calculate the effect on each
    division’s net income for the year.

B. Now assume the Video Division of Kessler
plans to sell 115,000 of these monitors to outside customers in the coming
year. The EDD Division needs and has been buying 20,000 identical monitors per
year from an outside supplier at a price of $135. The Video Division can
eliminate $12 per monitor of variable costs on any transfers to the EDD
Division because no sales commissions will be paid on any monitors sold to the
EDD Division.

  1. If the two divisions agree to a
    transfer price of $120 per monitor, calculate the effect on each
    division’s net income for the year.

  1. What is the minimum transfer price for
    the monitor that the Video Division should be willing to accept on an
    internal transfer?

C. List at least three qualitative
factors that should be considered when deciding whether the Video Division
should sell computer monitors to the EDD Division of Kessler Enterprises.

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