Topic: Transfer of pricing
Uninder Corporation produces automobile parts and it primarily sells parts to external customers. One of its subsidiary companies uses a part which can be produced by Uninder Corporation and it requires 10,000 units annually. Uninder Corporation has no idle capacity. The subsidiary company has a bid from an external supplier for the parts at £31.00 per unit. The variable production costs for these parts would amounts to £12.00 per unit. Packaging and shipping costs for the part would be only £2.00 per unit. To fill the order from the subsidiary company, Uninder should give up the production of another part, TW3. It sells the part for £35.00 per unit, and requires £13.00 per unit in variable production costs. Packaging and shipping costs for TW3 would be only £3.00 per unit. The company is producing and selling 50,000 units of the TW3 each year. The production and sales of the TW3 would drop by 10% if the part is produced for the subsidiary company.
- Calculate the minimum price that would be acceptable for the Uninder Corporation to retain the present profit.
- Calculate the opportunity cost per unit for the Uninder Company
- If the lowest acceptable transfer price to the selling division is £90 and the lost contribution margin per unit on outside sales is £40, determine the variable cost per unit.