[ Ch 12 | ezto.mheducation tpx Weller Industries is a decentralized organization

Question

[ Ch 12 | ezto.mheducation tpx Weller Industries is a decentralized organization with six divisions. The company's Electrical Division produces a variety of electrical items, including an x52 electrical fitting. The Electrical Division (which is operating at capacity) sells this fitting to its regular customers for $14.00 each; the fitting has a variable manufacturing cost of $8.45 The company's Brake Division has asked the Electrical Division to supply it with a large quantity of X52 fittings for only $8 50 each. The Brake Division, which is operating at 60% of capacity, will put the fitting into a brake unit that it will produce and sell to a large commercial airline manufacturer. The cost of the brake unit being built by the Brake Division follows Purchased parts (from outside vendors) Electrical fitting X52 Other Fixed overhead and administration Total cost per brake unit S 37.00 8.50 20.60 12.00 costs Although the $8 50 price for the X52 fitting represents a substantial discount from the regular S1400 price the manager of the Brake Division believes that the price concession is necessary if his division is to get the ontract for the airplane brake units. He has heard through the grapevine" that the airplane manufacturer plans to reject his bid if it is more than $78.35 per brake unit. Thus, if the Brake Division is forced to pay th regular $14.00 price for the X52 fitting, it will either not get the contract or it will time when it is already operating at only 60% of capacity The manager of the Brake Division argues that the price concession is imperative to the well-being or both his division and the company as a whole suffer a substantial loss Weller Indu uses return on investment (ROl) to measure divisional performance Required ume that you are t the manage r of the Electrical Division LL PHONE USE RECEIPTS GIVEN ON ALL TRANSACTIONS 1

Explanation / Answer

1 a. Minimum transfer price=Variable cost+Contribution lost from outside sales=8.45+(14-8.45)=$14 b. No 2 Net positive effect on company's profit: Selling price of the brake units 78.35 Less: The cost of fittings used in the brakes 14 Variable cost of the brake division excluding fitting (37+20.60) 57.6 71.6 Increase in profit 6.75 3 Lowest transfer price=14 Highest transfer price=Lowest transfer price +Increase in profit=14+6.75=$20.75 Range= $14 to $20.75

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