If Y division wants to have an ROI of 20%, what is the maximum transfer price it will accept from Division X if it pays for new premises?
XYZ Company has two divisions, X and Y. X makes product X1 and Y makes product Y+. Every unit of product Y+ requires one unit of product X1 as a component. Y purchases most of its X1 requirement from X although sometimes it makes purchases from outside suppliers.
Relevant details of products X1 and Y+ are tabulated as follows:
|
|
Product X1 |
Product Y+ |
|
Established selling price |
$30 |
$50 |
|
Variable Cost Per Unit - Mat |
8 |
5 |
|
Transfer price |
|
30 |
|
Labor |
5 |
3 |
|
|
2 |
2 |
|
Total Variable Cost |
15 |
40 |
|
Fixed Costs |
500,000 |
225,000 |
|
Annual Outside Demand |
100,000 |
25,000 |
|
Plant Capacity |
130,000 |
30,000 |
Investment in Divisions: (X) $ 6,625,000 (Y) $ 1,250,000
Division Y is currently achieving an
(a) Pay $50,000 per year for new premises which should allow an additional 5,000 units of Y+ to be sold each year at the existing price
(b) The management of XYZ should intervene to reduce the transfer price of the X1.
REQUIRED:
-If Y division wants to have an ROI of 20%, what is the maximum transfer price it will accept from Division X if it pays for new premises?
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