Meredith motor works has just obtained a new battery

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Reference no: EM13370631

Meredith Motor works has just obtained a new Battery Division. The Battery Division produces a standard 12 volt battery that it sells to retail outlets at a competitive price of $20. The retail outlets buy about 600,000 batteries a year. Since the Battery Division has a capacity of 1,000,000 batteries a year, top management is thinking that it might be wise for company's Automotive Division to start purchasing batteries from newly acquired Battery Division. The Batery Division's cost per battery is given below: Direct materials $8; direct labor 4; variable overhead 2; fixed overhead 2; total cost $16 *Based on 1,000,000 batteries. both divisions are to be treated as investment centers, and their performance is to be evaluated by the ROI formula.

Requried: (a) Find what transfer price would you recommend and why?

(b) Evaluate what transfer price would you recommend if the Battery division is now selling 1,000,000 batteries a year to retail outlets?

(c) Refer to (a) Top management has decided transfers between the two divisions should be at $19. Evaluate the effect of the transfer on the net income for the Battery Division, Automotive Division, and the total company

Reference no: EM13370631

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