Winton Industries Evaluates Its Divisions Based on Residual Income

Winton Industries evaluates its divisions based on residual income. The Springfield Division has the capacity to produce 20,000 units of a component. The Springfield Division's variable costs are $150 per unit and fixed costs are $110 per unit.
The Monnett Division can use the Springfield Division's product as a component in one of its products. The Monnett Division would incur $75 of variable costs to convert the component into its own product which sells for $300.
Required (consider each question independently):
(a) Assume the Springfield Division can sell all that it produces for $285 each. The Monnett Division needs 1,000 units. What is the appropriate transfer price?
(b) Assume the Springfield Division can sell 18,000 units at $285. Any excess capacity will be unused unless the units are purchased by the Monnett Division (which can use up to 1,000 units). What are the minimum and maximum transfer prices?

Correct Answer:

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(a)Springfield is operating at capacity,...

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