The Axle Division of Becker Company produces axles for off-road sport vehicles.
ID: 2420430 • Letter: T
Question
The Axle Division of Becker Company produces axles for off-road sport vehicles. One-third of Axle's output is sold to an internal division of Becker; the remainder is sold to outside customers. Axle's estimated operating profit for the year is: Internal Outside Sales $ 195,000 $ 450,000 Variable costs 120,000 200,000 Fixed costs 30,500 61,000 Operating profits $ 44,500 $ 189,000 Unit sales 15,000 25,000 The internal division has an opportunity to purchase 15,000 axles of the same quality from an outside supplier on a continuing basis. The Axle Division cannot sell any additional products to outside customers. What is the minimum selling price that Axle should accept from the internal division?
Explanation / Answer
MINIMUM SELLING PRICE SHOULD BE FIXED AT APOINT OF NO PROFIT NO LOSS. I;E ONLY THE VARIABLE AND FIXED COST PART SHOULD BE CHARGED.
BECAUSE WHETHER OR NOT THE INTERNAL DIVISON PURCHASES THE AXLES FROM THE AXLES DIVISON, IT HAS TO INCURRED THE FIXED COST, SO TO SAVE THE FIXED COST LOSS AXLES DIVISON CAN SELL THE PRODUCT AT BREAK EVEN POINT.
MINIMUM SELLING PRICE = ($120000 + $30500) / 15000UNITS
= $10.03
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