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) Assuming that
the Small Motor Division has excess capacity, compute the minimum acceptable
price for the transfer of small motor LN233 to the Household Division.
(b) Assuming that the Small Motor Division does not
have excess capacity, compute the minimum acceptable price for the transfer of
the small motor to the Household Division.
(c) Explain why the level of capacity in the Small
Motor Division has an effect on the transfer price.
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.
TUTORIAL PREVIEW
Effect on the income
of the Cycle Division
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Present
situation
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Purchase from
Frame Body
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Selling price
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$2,200
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$2,200
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Variable cost of goods sold
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