Sonora Manufacturing Inc. designs and builds off-road vehicles. The Frame Division builds frames that are used by the Assembly Division, and also sells frames externally to companies that produce vehicles such as golf carts. The Frame Division has an annual practical capacity of 5,000 units; a theoretical capacity of 7,300 units; and, a master-budget capacity of 4,000 units. The master-budget capacity is composed of 2,500 units produced for internal requirements, and the remainder sold externally for $800 per unit. The Frame Division has $150,000 of fixed costs. The variable costs for the units produced for internal purposes are $900 per unit, and for external sales $475. Sonora Manufacturing Inc. company policy is that internal transfers are to be done at full cost.
The Frame Division has been approached by a golf cart manufacturer who has offered to purchase 3,000 frames as a one-time special order for $650 per unit. This is an all or none order.
The Assembly Division can contract out the production of frames for $1,050 per unit.
Required:
a. Determine Frame Division's full cost per unit for the frames produced for internal use and the frames that a produced for external sales. Justify your choice of denominator activity level when calculating the fixed cost per unit.
b. Using the general guidelines for transfer pricing, what is the minimum transfer price the Frame Division should accept? Hint: There will be separate minimum transfer prices for the existing external customers and the one-time special order.
c. From a corporate point of view should the one-time special offer be accepted. Justify your answer on quantitative and qualitative considerations.
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