Kimer Company’s Small Motor Division produces a variety of small motors that are used in various…
Kimer Company’s Small Motor Division produces a variety of small motors that are used in various household and office appliances. Kimer’s Kitchen Products Division manufactures appliances such as blenders, juicers, coffee grinders, and so on. The most frequently used motor is Model A28, which can be purchased from a number of outside suppliers for $2.30 each. The manager of the Kitchen Products Division has approached the manager of the Small Motor Division and offered to buy 150,000 Model A28 small motors. The Small Motor Division currently is producing at capacity and produces and sells 200,000 Model A28 motors to outside customers for $2.30 each.
1. What is the minimum transfer price for the Small Motor Division? What is the maximum transfer price for the Kitchen Products Division? Is it important that transfers take place internally? If transfers do take place, what should the trans- fer price be?
2. Now assume that the Small Motor Division incurs selling costs of $0.20 per motor that could be avoided if the motors are sold internally. Identify the mini- mum transfer price for the Small Motor Division and the maximum transfer price for the Kitchen Products Division. Should internal transfers take place? If so, what is the benefit to the firm as a whole?
3. Suppose you are the manager of the Small Motor Division. Selling costs of
$0.20 per motor are avoidable if they are sold internally. Would you accept an offer of $2.20 from the manager of the other division? How much better off (or worse off) would your division be if this price is accepted?