39. $23 40. ($5,000) Use the following information to answer questions 39 throug
ID: 2494321 • Letter: 3
Question
39. $23
40. ($5,000)
Use the following information to answer questions 39 through 40. Nelcro Company has two divisions: Electrical and Motors. It evaluates its division managers on the basis of divisional profit. The Electrical Division produces a high-quality transformer. Sales and cost data on the transformer follow. Selling price per unit on the outside market.... Variable cost per unit Fixed cost per unit (based on capacity Capacity in units.75,000 $23 $12 The Motor Division currently purchases 5,000 transformers each year from an outside vendor at a cost of S44 each. It would like to begin purchasing the transformers from Electrical Division. 39. Assume Electrical Division sells 50,000 units a year to outside buyers. Compute the lowest price at which it would be willing to transfer the transformers to Motor Division. 40. Assume that Electrical Division currently sells all the transformers it can produce to outside buyers. Compute the amount by which corporate profit would change if it transferred 5,000 of these transformers to Motor Division at a price of S42 each instead of selling them externally.Explanation / Answer
Answer:
39) Currently ElectricDivision sale 50,000 units to outsiders.
Profit on selling 50,000 units is as follows:
:Sales = 50,000 x 45 =$2,250,000
Less: Variable Cost = ($1,150,000)
Contribution = $1,100,000
Less: Fixed Cost = 75000units x 12 = ($900,000)
Profit = $200,000
It is clear fromthe above statement that Electric Division has rrecovered its fixed cost from selling 50000 units and are in profitable situation. Hence in order to evaluate divisional price for More Division fixed cost is irrelevant and treated as sunk cost because it will not incur in future and has no relevance in decision making.
Now, EElectric Division has more capacity to produce further 25,000 units and by selling to Motor Division company will save $21 per unit ($44 - $23)
Hence the lowest price which Electric Division can offer to transfer to Motor Division is Variable Cost I.e., $23 per unit of transformer
40) Electric Division's Contribution Margin by selling 45,000 Units to outsider (45 - 23) = $22 per Unit
Contribution Lost by selling unit to Motor Division at $42 = $42 - $23 = $19 per unit
Statement of profit of company as a whole
($95,000)
Total Contribution
Less: fixed Cost
Profit/(loss)
$895,000
($900,000)
($5000)
Hence company will lose $5000 if Electric Division sells transformer to Motor Division at $42 per unit
Particulars calculation amount Electric Division Contribution Margin from sale to outsiders 45,000 x 22 $990,000 Contribution lost by transferring to Motor Division 5000 x 19($95,000)
Total Contribution
Less: fixed Cost
Profit/(loss)
$895,000
($900,000)
($5000)
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