Determine
minimum transfer price. (SO 4)
E11-11
Allied Company’s Small Motor Division manufactures a number
of small motors used in household and office appliances. The Household Division
of Allied then assembles and packages such items as blenders and juicers. Both
divisions are free to buy and sell any of their components internally or
externally. The following costs relate to small motor LN233 on a per unit
basis.
|
Fixed
cost per unit
|
$5
|
|
Variable
cost per unit
|
$8
|
|
Selling
price per unit
|
$30
|
Instructions
(a)
Assume that Frame Body has excess capacity and is able to meet all of the Cycle
Division’s needs. If the Cycle Division buys 1,000 frames from Frame Body,
determine the following: (1) effect on the income of the Cycle Division; (2)
effect on the income of Frame Body; and (3) effect on the income of Travel Velocity.
(b)
Assume that Frame Body does not have excess capacity and therefore would lose
sales if the frames were sold to the Cycle Division. If the Cycle Division buys
1,000 frames from Frame Body, determine the following: (1) effect on the income
of the Cycle Division; (2) effect on the income of Frame Body; and (3) effect
on the income of Travel Velocity.
SOLUTION PREVIEW (The
Solution is done in EXCEL TEMPLATE)
EXERCISE 11-11
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(a)
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Minimum Transfer Price
- with excess capacity
|
|
Given that the Small Motor Division has excess apacity, the
minimum transfer price is the variable cost of $8.00 per unit.
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