Coronado Industries produces 60000 CDs on which to record music. The CDs have th

Question

Coronado Industries produces 60000 CDs on which to record music. The CDs have the following costs:

None of Coronado Industries’s fixed overhead costs can be reduced, but another product could be made that would increase profit contribution by $4000 if the CDs were acquired externally. If cost minimization is the major consideration and the company would prefer to buy the CDs, what is the maximum external price that Coronado Industries would be willing to accept to acquire the 60000 units externally?

The Can Division of Marigold Corp. manufactures and sells tin cans externally for $1.00 per can. Its unit variable costs and unit fixed costs are $0.24 and $0.18, respectively. The Packaging Division wants to purchase 50,000 cans at $0.42 a can. Selling internally will save $0.04 a can.

Assuming the Can Division has sufficient capacity, what is the minimum transfer price it should accept?

The Can Division of Sheridan Company manufactures and sells tin cans externally for $0.80 per can. Its unit variable costs and unit fixed costs are $0.24 and $0.12, respectively. The Packaging Division wants to purchase 50,000 cans at $0.36 a can. Selling internally will save $0.07 a can.

Assuming the Can Division is already operating at full capacity, what is the minimum transfer price it should accept?

Explanation / Answer

Reduction of Total Costs if CDs are purchased Direct Materials $11,000 Direct labor $13,000 Variable overhead $4,500 Total reduction of costs $28,500 Increase in profit contribution $4,000 Maximum external price $32,500 (28500+4000) Answer: $32,500 Since there is sufficient capacity Marginal cost of Can Division $0.24 Saving in cost $0.04 Minimum Transfer Price $0.20 (0.24-0.04) Answer:$0.20 If the Can division is operating in full Capacity External Selling price per unit $0.80 Variable cost $0.24 Contribution Margin $0.56 Saving in Cost $0.07 Required contribution margin $0.49 (0.56-0.07) Since it is operating in full capacity, the production for external client needs to be diverted for internal transafer Hence Required minimum unit contribution $0.49 Required minimum transfer price $0.73 (0.49+0.24) Minimum transfer price it should accept $0.73 Answer : $0.73

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