The Nicholson and Cage Divisions are part of the same company. Currently the Cage Division buys a part from Nicholson for $82. The Nicholson Division wants to increase the price of the part it sells to Cage to $100. Cage Division can buy the part from an outside supplier for $94. The cost data for the Nicholson Division is as follows: $\begin{array}{ll}
\text { Direct materials } & \$ 2550 \
\text { Direct labor } & 3250 \
\text { Variable overhead } & 2250 \
\text { Fixed overhead } & 9.60
\end{array}$ Required:
a. If Nicholson ceases to produce the parts for Cage, it will be able to avoid one- fourth of the fixed manufacturing overhead. The Nicholson Division has excess capacity but no alternative uses for its
facilities.
From the standpoint of the company as a whole, should Cage continue to buy from Nicholson or start to
buy
from the outside supplier?
b. What should the transfer price for the part be?

Question

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The Answer of The Nicholson and Cage Divisions are part of the same company. Currently the Cage Division buys a part from Nicholson for $82. The Nicholson Division wants to increase the price of the part it sells to Cage to $100. Cage Division can buy the part from an outside supplier for $94. The cost data for the Nicholson Division is as follows: $\begin{array}{ll}
\text { Direct materials } & \$ 2550 \
\text { Direct labor } & 3250 \
\text { Variable overhead } & 2250 \
\text { Fixed overhead } & 9.60
\end{array}$ Required:
a. If Nicholson ceases to produce the parts for Cage, it will be able to avoid one- fourth of the fixed manufacturing overhead. The Nicholson Division has excess capacity but no alternative uses for its
facilities.
From the standpoint of the company as a whole, should Cage continue to buy from Nicholson or start to
buy
from the outside supplier?
b. What should the transfer price for the part be?

The Nicholson and Cage Divisions Are Part of the Same