The Adam Division produces a component that is used by the West Division. The co
ID: 2353673 • Letter: T
Question
The Adam Division produces a component that is used by the West Division. The cost of manufacturing the component is as follows:Direct materials $30
Direct labor 8
Variable overhead 10
Fixed overhead 12
Total cost $60
a Based on a practical volume of 250,000 components
Other costs incurred by the Adam Division are as follows:
Fixed selling and administrative $1,200,000
Variable selling $4 per unit
The component usually sells for $90 in the external market. The Adam Division is capable of producing 250,000 components per year; however, only 200,000 components are expected to be sold next year. The variable selling expenses are avoidable if the component is sold internally.
The West Division has been buying the same component from an external supplier for $80 each. The West Division expects to use 40,000 units of the component next year. The manager of the West Division has offered to buy 40,000 units from the Adam Division for $56 each.
Explanation / Answer
60$ per unit
so for 250000 cost of maufacture is 250,000*60=15,000,000$
Fixed selling and administrative $1,200,000
total manufacture cost=16,200,000
each has costed=64.8$
they are selling each componet for 90$
so 200,000*90=18,000,000
total variable cost=50000*4=200,000
total input=16,400,000
total Selling price=2,250,000
profit=22,500,000-16,400,000=6,100,000$
each year it buys at 80$ from other buyer but it inteds to buy 40000 at 56$ from it
as the manufacture cost is 64.8$ and variable selling is 4$ so by selling it they are at a loss of 4
.8$ for 40000 units
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