The Spanish Watch Company has two divisions and manufactures one type of watch. The two divisions are the production Division and the Package & Delivery, Division. The production Division manufactures watches and then sells them to the Package & Delivery Division, which packs the watches and sells them to retailers. The market price for the Package & Delivery Division to purchase this watch is £40. Production’s cost per watch are: £ Direct materials 6 Direct labour 7 Variable overhead 5 Division fixed cost 2 Package & Delivery’s cost per watch are: £ Direct materials 9 Direct labour 3 Variable overhead 4 Division fixed cost 16 Notes: Fixed costs shown above are per watch for 100,000 units. If the Production Division has excess capacity to produce 100,000 watches which it cannot sell externally, must it negotiate a transfer price below £40 per watch internally? If the production division cannot negotiate the appropriate transfer price with internal package and delivery division, what is the consequence of this? Explain.
The Spanish Watch Company has two divisions and manufactures one type of watch. The two divisions are the production Division and the Package & Delivery, Division. The production Division manufactures watches and then sells them to the Package & Delivery Division, which packs the watches and sells them to retailers. The market price for the Package & Delivery Division to purchase this watch is £40.
|
Production’s cost per watch are: |
£ |
|
Direct materials |
6 |
|
Direct labour |
7 |
|
Variable overhead |
5 |
|
Division fixed cost |
2 |
|
Package & Delivery’s cost per watch are: |
£ |
|
Direct materials |
9 |
|
Direct labour |
3 |
|
Variable overhead |
4 |
|
Division fixed cost |
16 |
Notes: Fixed costs shown above are per watch for 100,000 units.
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If the Production Division has excess capacity to produce 100,000 watches which it cannot sell externally, must it negotiate a transfer price below £40 per watch internally? If the production division cannot negotiate the appropriate transfer price with internal package and delivery division, what is the consequence of this? Explain.
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