Division a Makes Watzits

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?

Correct Answer:

Verified

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