The materials used by the Winston-Salem Division of Fox Company are currently pu
ID: 2571405 • Letter: T
Question
The materials used by the Winston-Salem Division of Fox Company are currently purchased from outside suppliers at $86 per unit. These same materials are produced by Fox's Flagstaff Division. The Flagstaff Division can produce the materials needed by the Winston-Salem Division at a variable cost of $36 per unit. The division is currently producing 161,000 units and has capacity of 230,000 units. The two divisions have recently negotiated a transfer price of $55 per unit for 69,000 units. By how much will each division's income increase as a result of this transfer? Winston-Salem Division $ Flagstaff Division $
Explanation / Answer
Answer
Flagstaff Division is producing 161000 units currently, and can produce 69000 units extra.
It produces each unit at $36 per unit Variable cost. It will transfer 69000 units to Salem Division at $55 per unit.
Salem Division currently purchases from outside at $86. If transferred from Flagstaff division, it will get the same at $55 per unit.
Just for the sake of comparison and explanation, lets just say that Flagstaff currently sells at $55 to outside customer as well. And Salem Division sells the final product to outside customer @100 per unit.
Flagstaff Division
Salem Division
Sales---
To outside
[161000 units @ $55 per unit] 8855000
[69000 units @ $100 per unit] 6900000
To Salem Division
0
0
Total Sales
8855000
6900000
Variable cost
[161000 units @ $36 per unit] 5796000
0
Purchase cost
0
[69000 units @ $86 per unit] 5934000
Total Cost
5796000
5934000
Net Income [Sales – Cost]
3059000
966000
Total Net Income = 3059000 + 966000 = $4,025,000
Flagstaff Division
Salem Division
Sales---
To outside
[161000 units @ $55 per unit] 8855000
[69000 units @ $100 per unit] 6900000
To Salem Division
[69000 units @ $55 per unit] 3795000
0
Total Sales
12650000
6900000
Variable cost
[230000 units @ $36 per unit] 8280000
0
Transfer Cost
0
[69000 units @ $55 per unit] 3795000
Total Cost
8280000
3795000
Net Income [Sales – Cost]
4370000
3105000
(-) Old Net Income
3059000
966000
Increase in Net Income
1311000
2139000
Total proposed Net Income = 4370000 + 3105000 = $7,475,000
Increase in Contribution of additional sales in FLAGSTAFF division = 69000 units x (55-36) = $1311000
Saving of cost of Salem Division = 69000 units x (86-55) = $2139000
Increase in contribution + Saving in cost = Net Increase in income
Net Increase in income = 1311000 + 2139000 = $3,450,000
Flagstaff Division
Salem Division
Sales---
To outside
[161000 units @ $55 per unit] 8855000
[69000 units @ $100 per unit] 6900000
To Salem Division
0
0
Total Sales
8855000
6900000
Variable cost
[161000 units @ $36 per unit] 5796000
0
Purchase cost
0
[69000 units @ $86 per unit] 5934000
Total Cost
5796000
5934000
Net Income [Sales – Cost]
3059000
966000
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.