Alto
Company
consists of the Red River Division and the White Mountain Division. Red River
produces and sells 100 pound bags of pottery clay which can either be
sold to outside customers or to White Mountain.
The following data are available from the last year:
Red
River:
Product capacity in 100 lb.
bags. 18,000 units
Selling price per bag to outside
customers $20
Variable product cost per
bag 10
Variable selling cost per
bag 4
White
Mountain:
Number of bags needed
annually 6,000 units
Price per bag paid to an outside
supplier $ 16
By selling to White Mountain, Red
River will avoid $3 per bag in selling costs.
a. If
Red River sells 18,000 bags annually to outside customers, what transfer price
would be computed using the
formula? Show calculations.
b. Assume Red River can sell 18,000 bags to
outside customers and that White Mountain's outside supplier has lowered its price
to $15. What is the effect on overall
company profits if Top Management wants to keep the profits "within the
corporate family" and forces Red River to sell to White Mountain at a
transfer price of $15? Show
calculations.
TUTORIAL PREVIEW
a. If Red River sells 18,000 bags annually to
outside customers, what transfer price would be computed using the formula? Show calculations.
Transfer price = Variable
product cost per bag +
File name: Alto Company consists.doc File type:xls PRICE: $5
