Johnson Corp. has two divisions, Division A and Division B. Division B has asked

Question

Johnson Corp. has two divisions, Division A and Division B. Division B has asked Division A to supply it with 5,000 units of part WD26 this year to use in one of its products. Division A has the capacity to produce 25,000 units of part WD26 per year. Division A expects to sell 21,000 units of part WD26 to outside customers this year at a price of $20.00 per unit. To fill the order from Division B, Division A would have to cut back its sales to outside customers. Division A’s variable manufacturing cost (direct labor + direct material + variable overhead) for part WD26 is $12.00 per unit. The variable selling cost when selling to outside customers is $2.00 per unit. This variable selling cost would not have to be incurred on sales of the parts to Division B. 5.1.

Calculate Division A’s minimum acceptable transfer price.

5.2. Baker Inc. has approached Division B and has offered to sell 5,000 units of the part for $18 per unit. Division B can either purchase the part from Baker Inc. or transfer it from Division A. How much does the overall profit of Johnson Inc. increase or decrease if Division B accepts Baker’s offer and declines to transfer any units from Division A.

Please help me solve these two questions step by step: First question the answer is 13.20

Explanation / Answer

Solution:-

5.1 Division A’s minimum acceptable transfer price:-

$ 13.20 per unit.

Explamnation:-

5.2

If devision B accepts Baker's offer the overall profit of Johson inc. will decrease by $ 24,000.

Explanation:-

Please Rate or comment if you have any doubt regarding this solution.

Total cost for 4,000 units (spare units):- Variable manufacturing cost (4,000 * 12.00) (a) 48,000 Total cost for 1,000 units (cut back its sales to outside customers):- Variable manufacturing cost (1,000 * 12.00) 12,000 Contribution lost (20.00 - 12.00 - 2.00)* 1,000 6,000 Total cost for 1,000 units (b) 18,000 Division A’s minimum acceptable transfer price per unit (a + b) / 5,000 13.20

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