The Molding Division of Cotwold Company manufactures a plastic casing used by th

Question

The Molding Division of Cotwold Company manufactures a plastic casing used by the Assembly Division. This casing is also sold to external customers for $44 per unit. Variable costs for the casing are $31 per unit and fixed cost is $6 per unit. Cotwold executives would like for the Molding Division to transfer 27,000 units to the Assembly Division at a price of $38 per unit. Assume that the Molding Division has enough excess capacity to accommodate the request. Required 1. Should the Molding Division accept the $38 transfer price proposed by O Yes O No 2. Calculate the effect on Molding Division's net income if it accepts the $38 transfer price Net Income

Explanation / Answer

1.YES.

Molding division should accept the $38 transfer price, since it is greater than the variable costs of $31 per unit, and molding division has enough excess capacity to accomodate the request.

2. effect on net income = (transfer price - variable cost) * number of units

=>($38 - $31) *27,000

=>$189,000.

Net Income $189,000 Increase

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