Max Ltd Produces Kitchen Tools, and Operates Several Divisions as Investment

Max Ltd. produces kitchen tools, and operates several divisions as investment centers. Division M produces a product that it sells to other companies for $16 per unit. It is currently operating at full capacity of 45,000 units per year. Variable manufacturing cost is $9 per unit, and variable marketing cost is $3 per unit. The company wishes to create a new division, Division N, to produce an innovative new tool that requires the use of Division B's product (or one very similar). Division N will produce 30,000 units per year. Currently, Division N can purchase a product equivalent to Division M's from Company X for $15 per unit. However, Max Ltd. is considering transferring the necessary product from Division M.
Required:
1. Assume the transfer price is $12 per unit:
a. How would this price affect the purchasing costs of Division N?
b. How would this price affect the profits of Division M?
c. How would this price affect Max Ltd. as a whole?
2. What if the transfer price were $13 per unit?

Correct Answer:

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1. a. Division N needs 30,000 units. Out...

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