The Appraisal Department of Jean Bank performs appraisals of business properties for loans being considered by the bank and appraisals for home buyers that are financing their purchase through some other financial institution. The department charges $160 per home appraisal, and its variable costs are $130 per appraisal.
Recently, Jean Bank has opened its own Home-Loan Department and wants the Appraisal Department to perform 1,200 appraisals on all Jean Bank–financed home loans. Bank management feels that the cost of these appraisals to the Home-Loan Department should be $150. The variable cost per appraisal to the Home-Loan Department would be $8 less than those performed for outside customers due to savings in administrative costs.
(a)
Determine the minimum transfer price, assuming the Appraisal Department has excess capacity. (Round answer to 2 decimal places, e.g. 10.50.)
(b)
Determine the minimum transfer price, assuming the Appraisal Department has no excess capacity. (Round answer to 2 decimal places, e.g. 10.50.)
(c)
Assuming the Appraisal Department has no excess capacity, should management force the department to charge the Home-Loan Department only $150?
Recently, Jean Bank has opened its own Home-Loan Department and wants the Appraisal Department to perform 1,200 appraisals on all Jean Bank–financed home loans. Bank management feels that the cost of these appraisals to the Home-Loan Department should be $150. The variable cost per appraisal to the Home-Loan Department would be $8 less than those performed for outside customers due to savings in administrative costs.
(a)
Determine the minimum transfer price, assuming the Appraisal Department has excess capacity. (Round answer to 2 decimal places, e.g. 10.50.)
| Minimum transfer price | $ |
(b)
Determine the minimum transfer price, assuming the Appraisal Department has no excess capacity. (Round answer to 2 decimal places, e.g. 10.50.)
| Minimum transfer price | $ |
(c)
Assuming the Appraisal Department has no excess capacity, should management force the department to charge the Home-Loan Department only $150?
(a)
Minimum transfer price = ($130 - $8) + $0 = $122
(b)
Minimum transfer price = ($130 - $8) + ($160 - $130) = $152
(c)
No. By forcing the Appraisal Department to accept the $150 per appraisal price, management is penalizing the Appraisal department. If the department was allowed to sell its services to outside customers, it could earn $30 ($160 – $130) in contribution margin per appraisal. Forcing them to sell their services internally would allow them to earn only $28 ($150 – $122) in contribution margin. A loss of $2 per appraisal or a total of $2,400 (1,200 × $2) would result.
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