Question 11 4 pts General Dynamic has two divisions. The Pistons division makes

Question

Question 11 4 pts General Dynamic has two divisions. The Pistons division makes high quality steel pistons used in motors. The Motors division makes motors used in industrial sized equipment. The variable cost of making a piston is $80.00 per unit. The variable selling expense is $5.00 per unit. The fixed manufacturing overhead cost is $20.00 per unit. The Pistons division currently sells a piston for $150.00 per unit to outside customers. This is the current market price for similar pistons purchased by the Motors division. The Motors division would like to buy 1,000 pistons from the Pistons division. The Pistons division is currently at maximum capacity and would have to forgo sales to an outside customer if accepted, but it would not have to pay for variable selling expense. What is the price range in which the two divisions would be willing to negotiate? $145-$150 $80-$150 $80-$145 $105-$150

Explanation / Answer

Answer Q11 The answer is Price Range $80 - $150. Piston division must cover it's variable cost of making piston while deciding to sell it to Motor division of same company. If it don't do that then piston division will be at loss.Hence it must quote minimum price $80. Piston division sell the piston to outside customer @ $150 , hence max price it can quote is $150. Fixed cost is irrelevant in decision making whereas it will not incurr any selling cost when selling piston to Motor division. Answer Q12 Cost-plus pricing is a pricing method in which selling price of a product is determined by adding a profit margin to the cost per unit of the product. Cost per unit includes actual direct materials, actual direct labor, actual variable manufacturing overheads and allocated fixed manufacturing overheads. Required return on investment is 30% i.e. 30% of $150000 = $45,000 Return per unit = $45000 / 20000 bottles = $2.25 per unit Cost per unit Variable product cost $6.00 Fixed overhead cost [$100000/20000 bottles] $5.00 Cost per unit $11.00 Markup required per unit Variable selling and administrative exp. $1.20 Fixed selling and administrative exp[$23400 / 20000 bottles] $1.17 Required return per unit $2.25 Markup required per unit $4.62 Markup % = Markup / Cost per unit = $4.62 / $11 = 42% The answer is 42%

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