Partial idle capacity sets a 3.79-dollar floor, an outside roaster caps the price at 4.50, and 4.15 splits the gain in this AC505 Unit 5 transfer pricing problem. Searches like "ac 505 unit 5 assignment example", "ac505 unit 5 sample" and "ac505 unit 5 example" land here.
What a finished AC505 Unit 5 transfer pricing problem looks like
A fact block, a floor calculation, a range diagram and two short letters. The facts: roasted almonds cost the ingredients division 3.35 dollars a pound in variable cost and sell outside at 4.60, with 0.15 of selling cost avoided on internal transfers; the line can roast 3,000,000 pounds and outside customers take 2,640,000. The consumer division can buy from an outside roaster at 4.50. The floor calculation charges variable cost on all 600,000 pounds plus the 1.10 a pound of contribution lost on the 240,000 pounds that displace outside sales, which gives 3.79. The range diagram runs from that floor to the 4.50 ceiling. Against a current policy of full cost plus 20 percent, 4.62, the consumer division has been threatening to buy outside.
How a AC505 Unit 5 example is structured
The problem begins with capacity, since the unit commonly hinges on spare roasting time, and here some exists. The first section splits the 600,000 pounds into 360,000 that fill idle hours and 240,000 that would push out external sales, then computes an opportunity cost only for the second group. The blended floor follows, alongside the two pure cases: 3.35 if every pound fit in idle time and 4.45 if none did. The ceiling comes from the outside supplier. A company-wide view shows why the transfer matters at all: buying outside would cost the firm 426,000 dollars a year, mostly on the idle portion. The policy price is then examined and shown to push the buyer outside. A recommended price of 4.15, and a seasonal rule for lots roasted in the slack months, close the problem with a letter to each manager.
Idle for some pounds, not all
The line can roast 3,000,000 pounds and sells 2,640,000 outside, leaving 360,000 idle. The remaining 240,000 pounds the consumer division wants would displace outside sales earning 1.10 a pound after avoided selling cost.
A floor built from two parts
Variable cost on all 600,000 pounds plus lost contribution on 240,000, spread across the whole transfer: 3.35 plus 0.44 gives 3.79. At full idleness the floor would be 3.35; with no idle time, 4.45. The problem shows all three.
The ceiling an outside roaster sets
An outside roaster quotes 4.50 a pound delivered. The consumer division would rationally buy outside at anything higher, so the negotiable range runs from 3.79 to 4.50.
A policy that pushes the buyer out
Full cost at budgeted volume, 3.85, plus 20 percent gives 4.62. Sitting above the ceiling, it invites an outside purchase that would cost the company 414,000 dollars on the idle pounds and 12,000 on the rest.
4.15, and a rule for slack months
At 4.15 the ingredients division gains 216,000 dollars and the consumer division saves 210,000 against the outside quote. Lots scheduled January through July, when roasting hours sit empty, would carry a lower floor, and the letters say how to share it.
Two letters, one number
The letter to the ingredients manager explains why the policy price loses the sale; the one to the consumer manager explains why 4.15 still beats 4.50. Each spells out what its recipient gives up.
Where marks go in AC505 Unit 5
Treating capacity as all idle or all full, when the facts say partly, is the error that most often sinks this problem, since the floor then lands at 3.35 or 4.45 instead of 3.79. Ignoring the selling cost an internal sale avoids overstates the opportunity cost by 0.15 a pound. Graders in AC505 typically look for the company-wide figure, because the internal price only shifts profit from one division to the other, and a paper that never shows the 426,000-dollar company effect has not shown why the price matters. Recommending the policy price, or any price above the outside quote, without noting that it drives the buyer away misses the incentive question. A single number with no argument to either manager earns less than a price defended in terms each division can accept, with the seasonal exception stated.
Get a AC505 Unit 5 example written to your instructions
Capacity facts decide transfer prices, so the Unit 5 case matters most for what it says about idle time, alongside both divisions' costs, outside prices, the volume wanted and the rubric. Floor, ceiling and a defended price are worked out within 24-48h, and a first custom sample is free.
AC505 Unit 5 questions, answered
How is the floor calculated when capacity is only partly idle?
Charge variable cost on every unit transferred, add the contribution the seller loses on the units that displace outside sales, and divide by the total transferred. That gives a blended minimum. It sits between the pure idle floor, variable cost alone, and the full-capacity floor, market price less avoided selling cost, in proportion to how much of the order displaces external business.
Why show the company-wide effect?
Because the transfer price only divides profit; it does not create any. The company gains or loses according to whether the transfer happens, and here buying outside would cost it 426,000 dollars a year. Showing that figure explains why headquarters cares about the negotiation and why a price sending the buyer outside is a problem even if one division looks better.
Can a transfer price differ by season?
It can, and where capacity is idle in some months and full in others a seasonal rule often fits better than one annual figure. Lots produced in slack months carry no opportunity cost, so their floor is lower. The trade-off is administrative complexity and the risk that the buying division games its schedule, which the answer should name.