The Chip Division of Computer Co. has just revised its actual cost data for the year just ended. Chip Division transfers circuit boards to the Assembly Division, and incurs no selling expense for such transfers. Assembly Division can buy the same goods in the open market for $71 each. Chip's new cost data are:
Current production is 400,000 units, and Chip has a capacity of 600,000 units.
Required:
a. What is the lowest price Chip should charge for the internal transfer of its goods?
b. What is the highest price Assembly should pay Chip for the units?
c. Give the primary reason why Chip should reduce its price for internal transfers below the market price.

Question

The Chip Division of Computer Co. has just revised its actual cost data for the year just ended. Chip Division transfers circuit boards to the Assembly Division, and incurs no selling expense for such transfers. Assembly Division can buy the same goods in the open market for $71 each. Chip's new cost data are:
  Current production is 400,000 units, and Chip has a capacity of 600,000 units.
Required:
a. What is the lowest price Chip should charge for the internal transfer of its goods?
b. What is the highest price Assembly should pay Chip for the units?
c. Give the primary reason why Chip should reduce its price for internal transfers below the market price.

Quizplus · Accepted Answer

The Answer of The Chip Division of Computer Co. has just revised its actual cost data for the year just ended. Chip Division transfers circuit boards to the Assembly Division, and incurs no selling expense for such transfers. Assembly Division can buy the same goods in the open market for $71 each. Chip's new cost data are:
  Current production is 400,000 units, and Chip has a capacity of 600,000 units.
Required:
a. What is the lowest price Chip should charge for the internal transfer of its goods?
b. What is the highest price Assembly should pay Chip for the units?
c. Give the primary reason why Chip should reduce its price for internal transfers below the market price.