Corporate policy at Weber Pty Ltd requires that all transfers between divisions

Question

Corporate policy at Weber Pty Ltd requires that all transfers between divisions be recorded at variable cost as a transfer price Divisional managers have complete autonomy in choosing their sources of customers and suppliers. The Milling Division sells a product called RK2. Forty per cent of the sales of RK2 are to the Products Division, while the remainder of the sales are to outside customers. The manager of the Milling Division is evaluating a special offer from an outside customer for 10 000 units of RK2 at a per unit price of $15. If the special offer were accepted, the Milling Division would be unable to supply those units to the Products Division. The Products Division could purchase those units from another supplier for $17 per unit. Annual capacity for the Milling Division is 25 000 units. The 2014 budget information for the Milling Division, based on full capacity, is presented below Units Sales Variable costs Fixed costs Products division 10 000 S100 000 (S100 000) (S24 000) Outsiders 15 000 S270 000 (S150 000) (S36 000) Total 25 000 S370 000 (S250 000) (S60 000) Assuming the Milling Division manager agrees to the special offer, what is the effect of the decision on the gross margin of Weber as a whole? A. $20 000 decrease B. $50 000 decrease C. $30 000 increase D. $50 000 increase

Explanation / Answer

Exisiting Gross Margin Product division Outsider Total Units 10,000 15000 25,000 Sales                  1,00,000 270000 3,70,000 Variable cost                  1,00,000          1,50,000 2,50,000 Gross Margin 1,20,000 Revised Gross margin Outsider sale would change with additional 10,000 units @ 15/- And Variable cost to add in Outsider by 10,000 units @ 10/- And Variable cost of Product division would change to 10,000 @17/- Product division Outsider Total Units 10,000 25000 35,000 Sales                  1,00,000 420000 5,20,000 Variable cost                  1,70,000          2,50,000 4,20,000 Gross Margin 1,00,000 Hence Difference between OLD & Revised Gross margin would be IT iS DECREASE of 20,000 $ and hence option A would be correct

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