Hamlet Industries is organized into two divisions, Fabrication and Finishing. Both divisions are considered to be profit centers, and the two division managers are evaluated in large part on divisional income. The company makes a single product. It is manufactured in Fabrication and then packaged and sold in Distribution. There is no intermediate market for the product.
The monthly income statements, in thousands of dollars, for the two divisions follow:
Fabrication ($000) $4,800 $3,840 $960 $800 $160
Distribution ($000) $8,000 $5,920 $2,080 $1,280 $800
Revenues Variable costs Contribution margin Fixed costs Divisional profit
The company has just received an offer to buy 3,200 units of the product this month as a special order. The transfer price will be set at 50 percent of the sales price, or $100 per unit.
Required:
a. What is the current transfer price for a unit?
b. Does Hamlet Industries want to accept this order?
c. Will the Distribution Division manager be willing to accept this order if the transfer price is $100 per unit?
d. Will the Fabrication Division manager be willing to accept this order if the transfer price is $100 per unit?
a. Current transfer price per unit
b. Hamlet Industries' decision
c. Distribution Division manager's decision
d. Fabrication Division manager's decision