Reference no: EM13574862

Problem 1:Division A offers its product to outside markets for $60. It incurs variable costs of $22 per unit and fixed costs of $75,000 per month based on monthly production of 5,000 units. Division B needs 2,000 units of the product that Western produces, but it currently buys them from an outside supplier for $63 per unit. Division A's manager is willing to sell to Eastern for $60 per unit, but also wants a shipping fee of $4 per unit.

Question:

1. What are the maximum and minimum transfer prices here?
2. If Division A has enough excess capacity to cover Division B's needs, what price should be used? How would this affect the profits of Division A? How would this affect the company as a whole?
3. Would your answers to (b) change if Division A is currently selling 4,000 units?

Problem 2:A camera manufacture,currently purchases lenses from an outside company at a price of $200 per unit. While the quality of the lenses has always been very high,company's management believes it might be possible to produce a superior lens internally at a cost lower than $200. The accounting department has provided the following estimate of a per-unit manufacturing cost for the lens:

Direct materials	$88
Direct labor	$81
Variable overhead	$35
Fixed overhead allocation	$90
Total per unit	$294

The company's controller believes that the estimate may be incorrect because the corporation has excess manufacturing space and will not incur additional fixed overhead if they produce the lenses.

Question: Should the company make the lenses or continue to buy them? Show supporting calculations, including savings/loss if they need 15,000 lenses.