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Making effort to sell 20,000 units of XT86 to the Products Division, the external supplier...

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Accounting

Making effort to sell 20,000 units of XT86 to the Products Division, the external supplier offered a reduced price per unit of $700.

The manager of the Components Division has the option of:

  1. Cutting the external selling price to $800, with the certainty that sales to external customers will rise to 50,000, or
  2. Maintain the external price of $900 for the 30,000 units of XT86 and transferring the 20,000 units to products Division at a price that would produce the same operating profit for Components Division as option a).

Which option would be the best option for each division and for the company as a whole? Analyse the two options and explain why the option chosen is the best option. Show your calculations of the contribution margin for each division and the company of each option. What is the transfer price for option b)?

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