\"I need the awnsewrs for this question I submitted it last night and I did not
ID: 2422988 • Letter: #
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"I need the awnsewrs for this question I submitted it last night and I did not get the solotion and it took away one of my questions" Featured Exercise
Ajax Division of Carlyle Corporation produces electric motors, 20,000 of which are sold to Bradley Division of Carlyle and the remainder is sold to outside customers. Carlyle treats its divisions as profit centers and allows division managers to choose their sources of supply and to whom they sell. Corporate policy requires variable cost be used as the transfer price for all interdivisional sales and purchases. Ajax Division’s estimated revenues and costs for the coming year, based on the full capacity of 100,000 units, are as follows:
Bradley
External Customers
Revenues
$ 900,000
$8,000,000
Variable costs
900,000
3,600,000
Contribution margin
-0-
4,400,000
Fixed costs
300,000
1,200,000
Operating income
$(300,000)
$3,200,000
Unit sales
20,000
80,000
Ajax Division has an opportunity to sell the 20,000 motors to an external customer at a price of $75 per unit on a continuing basis beginning next year. Bradley can purchase its requirement of 20,000 motors from an external supplier at a price of $85 per unit.
a. Compute the increase/decrease in Ajax Division’s operating income if Ajax discontinues the sales to Bradley and adds the new customer for the coming year. Assume Ajax’s fixed costs are unavoidable.
b. Instead of using variable cost as the transfer price, assume Carlyle permits the division managers to negotiate the transfer price for next year. The managers agree on a transfer price: $75 per unit minus an equal sharing between the divisions of the additional operating income earned by Ajax from selling Bradley the 20,000 motors at $75 per unit. Compute the transfer price for next year.
Explanation / Answer
a: the increase/decrease in Ajax Division’s operating income if Ajax discontinues the sales to Bradley and adds the new customer:
The Net Operating Income increases by $600,000 thus setting loss of $300,000 aside and get NOI of $300,000.
b)
At the selling price of $75 per unit, there is a income of $15 per unit.
50% sharing of income leaves for deduction for transfer price = $15 /2 = $7.50 per unit
So, the transfer price to sell 20000 units for next year to Bradley division = $75 - $7.50 = $67.50 per unit
Sales (20000 * $75) $1,500,000 Less: Variable costs @$45 $900,000 Contribution $600,000 Less: Fixed Costs $300,000 Net Operating income $300,000Related Questions
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