Word Wizard is a publishing company with a number of different book lines. Each line has contracts with a number of different authors. The company also owns a printing operation called Quick Press. The book lines and the printing operation each operate as a separate profit center. The printing operation earns revenue by printing books by authors under contract with the book lines owned by Word Wizard, as well as authors under contract with other companies. The printing operation bills out at $0.01 per page, and a typical book requires 500 pages of print. A manager from Business Books, one of the Word Wizard’s book lines, has approached the manager of the printing operation offering to pay $0.007 per page for 1,500 copies of a 500-page book. The book line pays outside printers $0.009 per page. The printing operation's variable cost per page is $0.004. Determine whether the printing should be done internally or externally, and the appropriate transfer price, under each of the following situations.

Word Wizard is a publishing company with a number of different book lines. Each line has contracts with a number of different authors. The company also owns a printing operation called Quick Press. The book lines and the printing operation each operate as a separate profit center. The printing operation earns revenue by printing books by authors under contract with the book lines owned by Word Wizard, as well as authors under contract with other companies. The printing operation bills out at $0.01 per page, and a typical book requires 500 pages of print. A manager from Business Books, one of the Word Wizard’s book lines, has approached the manager of the printing operation offering to pay $0.007 per page for 1,500 copies of a 500-page book. The book line pays outside printers $0.009 per page. The printing operation's variable cost per page is $0.004.

Determine whether the printing should be done internally or externally, and the appropriate transfer price, under each of the following situations.

Assume that the printing operation is booked solid for the next 2 years, and it would have to cancel an obligation with an outside customer in order to meet the needs of the internal division. (Round Transfer price to 4 decimal places, e.g. 0.1892.)

Printing should be done		InternallyExternally
Minimum transfer price		$

(b)

Assume that the printing operation has available capacity. (Round Transfer price to 4 decimal places, e.g. 0.1892.)

Printing should be done		InternallyExternally
Minimum transfer price		$

(d)

Calculate the change in contribution margin to each division, and to the company as a whole, if top management forces the printing operation to accept the $0.007 per page transfer price when it has no available capacity. (Round answers to 2 decimal places, e.g. 10.50.)

ProfitLoss  to the printing operation		$
LossProfit  to the business books		$
LossProfit  to the company		$

(a)

Assuming no available capacity, the printing operation's variable cost is $0.004 per page and its opportunity cost is $0.006 ($0.01 - $0.004) per page. The minimum transfer price would be $0.01 ($0.004 + $0.006). Therefore, the printing operation would not accept the internal transfer price of $0.007.

(b)

Assuming that the printing operation has available capacity, the printing operation's variable cost is $0.004 and its opportunity cost is $0. The minimum transfer price would be $0.004 ($0.004 + $0). Therefore, in this case, the printing operation should accept the offer to print internally. The $0.007 transfer price would provide a contribution margin of $0.003 ($0.007 - $0.004) per page. Depending on its bargaining strength, the printing operation might want to ask for a transfer price higher than $0.007, since the company is saving money at any price below the $0.009 price that the line pays to outside printers.

(d)

The printing operation would lose:		($0.01 - $0.007) × 500 pages × 1,500 copies	=	($2,250)
Business Books would save:		($0.009 - $0.007) × 500 pages × 1,500 copies	=	1,500
Overall loss to the company as a whole:			=	($750)

Thanks