Author: Anonymous

You are the manager of the manufacturing division of Superior Corporation, and you need to determine the price that should be charged for component G that is transferred to the assembling division. Both divisions are evaluated as profit centres. The production costs for one unit of component G is as follows:   Direct materials $4.75 Direct labour 6.20 Variable overhead 3.15 Fixed overhead 2.32   The assembling division uses component G, along with externally supplied components, in the assembly of product F. The assembling division can sell product F externally for $52. The costs incurred by the assembling division, excluding the cost of component F, are as follows:   Direct materials $7.40 Direct labour 6.50 Variable overhead 4.27 Fixed overhead 3.39     Required Determine the maximum and the minimum transfer price that could be used for each unit of component G. Explain whether the managers would be able to negotiate a transfer price. Indicate what the transfer price would be if it is set equal to full production costs. Indicate what the transfer price would be if it is set equal to variable production costs. Briefly explain why the manufacturing division would be reluctant to transfer component G at a price equal to variable costs. Identify what other factors may have an influence on the determination of the transfer price.

Part 1 Superior Corporation sells casual shoes with a demand of 750 pairs every 3 months. The store incurs an ordering cost of $75 and a holding cost of 20%. The supplier offers Superior Corporation the following price structure:   Quantity Price 1 – 249 $40 250 – 349 $38 350 – 499 $36 Over 500 $34   Which order quantity results in the lowest cost? You need to support your answer with relevant calculations.   Part 2 Superior Corporation sells an average of 25 pairs of dress shoes but can sell a maximum of 38 pairs. It takes 15 days for an order of dress shoes to arrive after being ordered.   Required:   What is the safety stock level? What is the reorder point?

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