(Appendix 12A)Division A makes watzits.The company has sufficient capacity to make 70, 000 watzits per year.The company expects to sell 65, 000 watzits this year.Division B uses watzits in their production and has total needs of 20, 000 watzits this year.Division B is presently buying watzits from an outside supplier for $11.25 each.The cost to Division A to make the watzits are $5.00 for direct materials, $2.00 for direct labor, $2.50 for variable manufacturing overhead, and $1.50 for fixed manufacturing overhead.Direct labor is a variable cost.Division A sells watzits on the outside market for $11.50 each.
Required:
a.Assuming that Division B buys its entire 20, 000 requirement of watzits from Division A, is it possible for Division A and Division B to agree to a mutually acceptable transfer price and if so, within what range would that transfer price be?
b.Assuming that Division B buys only 5, 000 watzits from Division A, is it possible for Division A and Division B to agree to a mutually acceptable transfer price and if so, within what range would that transfer price be?

Question

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The Answer of (Appendix 12A)Division A makes watzits.The company has sufficient capacity to make 70, 000 watzits per year.The company expects to sell 65, 000 watzits this year.Division B uses watzits in their production and has total needs of 20, 000 watzits this year.Division B is presently buying watzits from an outside supplier for $11.25 each.The cost to Division A to make the watzits are $5.00 for direct materials, $2.00 for direct labor, $2.50 for variable manufacturing overhead, and $1.50 for fixed manufacturing overhead.Direct labor is a variable cost.Division A sells watzits on the outside market for $11.50 each.
Required:
a.Assuming that Division B buys its entire 20, 000 requirement of watzits from Division A, is it possible for Division A and Division B to agree to a mutually acceptable transfer price and if so, within what range would that transfer price be?
b.Assuming that Division B buys only 5, 000 watzits from Division A, is it possible for Division A and Division B to agree to a mutually acceptable transfer price and if so, within what range would that transfer price be?

(Appendix 12A)Division a Makes Watzits