# Critical Thinking

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CRITICAL THINKING PROBLEM DUE ON THURSDAY, NOVEMBER 15 (ALONG WITH CASE #5)

Europa, Inc., has two divisions, A and B, which manufacture expensive bicycles. Division A produces the bicycle frame, and Division B assembles the rest of the bicycle onto the frame. There is a market for both the subassembly and the final product. Each division has been designated as a profit center. The transfer price for the subassembly has been set at the long-run average market price. The following data are available for each division:

Selling price for final product \$300 Long-run average selling price for intermediate product 200 Incremental cost per unit for completion in Division B 150 Incremental cost per unit in Division A 120

The manager of Division B has made the following calculation: Selling price for final product \$300 Transferred-in cost per unit (market) \$200 Incremental cost per unit for completion 150 350 Contribution (loss) on product \$(50)
REQUIRED

1. Should transfers be made to Division B if there is no unused capacity in Division A? Is the market price the correct transfer price? Show your computations.
Outside sales of frames:
Selling price of intermediate product \$200
Incremental cost per unit in Division A (120)
Contribution margin per unit \$80

Transfer of frames to Division B:
Selling price of final product \$300
Incremental cost per unit in Division A (120)
Incremental cost per unit in Division B (150)
Contribution margin per unit 30
The contribution margin of outside sales of frames are \$50 bigger than transfer frames internally, so transfers should not be made.
Minimum market (transfer) price= \$120+ (200-120) = \$200

2. Assume that...

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