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. Production and sales amounted to units.
Fabrication $ Distribution $
Revenues $ $
Variable costs
Contribution margin $ $
Fixed costs
Divisional profit $ $
Assume there is no special order pending.
Required:
What transfer price would you recommend for Hamlet Industries?
Using your recommended transfer price, what will be the income of the two divisions, assuming monthly production and sales of units?
The manager of the Fabrication Division complains about the transfer price, saying that division profits are unfairly low. The two division managers meet and negotiate a transfer price of $ What will be the income of the two divisions, assuming monthly production and sales of units.
