Question

Negotiating a Transfer Price with Excess Capacity The Foundry Division of Findlay Pumps Inc. produces metal parts that are sold to the company's Assembly Division and to outside customers. Operating data for the Foundry Division for 2017 are as follows: To the AssemtdyOutside Division Customers Total Sales 400,000 parts x $8.50 $3,400,000 300,000 parts x $9.10 $2,730,000 $6,130,000 Variables expenses at $5.30 (2,120,000) (1.590,000) (3,710,000) Contribution margin 1,280,000 1,140,000 2.620,000 Fixed expenses (700,000) (525,000) (1,225,000) Net income $ 580,000 $615,000 $1,195,000 *Allocated on the basis of unit sales. The Assembly Division has just received an offer from an outside supplier to supply parts at $6.81 each. The Foundry Division manager is not willing to meet the $6.81 price. She argues that it costs her $7.05 per part to produce and sell to the Assembly Division, so she would show no profits on the Assembly Division sales. Sales to outside customers are at a maximum, 300,000 parts. a. Verify the Foundry Division's $7.05 unit cost figure. Variable costs $ Fixed costs 0 x Total unit cost $ 0 x c. Could the Foundry Division meet the $6.81 price and still show a net profit for sales to the Assembly Division? Show computations. Use a negative sign only to indicate a net loss. Otherwise do not use negative signs with your answers. Type here to search

Answer 1

a. Determine the unit cost of Foundry Division as shown below: Calculation Details Variable costs Add: Fixed costs Total unit cost Amount $5.30 $1.75 $7.05 [$1,225,000 - 700,000 parts) Thus, the total unit cost of Foundry Division is $7.05 Note: It is given fixed costs are allocated on the basis of unit sales. Determine the total number of parts sold as shown below: Number of parts sold = To assembly division + To outside customers = 400.000 parts + 300.000 parts = 700,000 parts c. Determine the net profit (loss) for sales to Assembly division at $6.81 price as shown below: Amount Calculation 400,000 parts $6.81 each 400,000 parts < $5.30 each Details Sales Less: Variable costs Contribution margin Less: Fixed costs Net profit (loss) $2.120.000 $604.000 $700.000 ($96.000) 400.000 parts x $1.75 each Thus, the net profit (loss) for sales to Assembly division at $6.81 price is (596,000)