Question

E. $1.80; Mantra Quin Limited has a number of divisions. One division. Style, makes zippers that are used in the manufacture of boots. Another division. Leather Stuff, makes boots that use the zippers and needs 90,000 zippers per year. Style incurs the following costs for one zipper: Direct materials $0.23 Direct labour $0.20 Variable overhead $0.95 Fixed overhead $1.32 Total $2.70 Quin has capacity to make 950,000 zippers per year, but due to a soft market, only plans to produce and sell 620,000 zippers next year. Leather Stuff currently buys zippers from an outside supplier for $3.50 each (the same price that Style receives). 26. Assume that Quin allows negotiated transfer pricing. What is the floor of the bargaining range and which division sets it? $3.50; Style $2.70; Leather Stuff $2.70; Style $1.38; Leather Stuff $1.38; Style 27. Assume that Style and Leather Stuff have agreed on a transfer price of $3.25. What are the total cost savings for Leather Stuff? $22,500 $315,000 $292,500 $69,000 $81,000 28. Assume that Style and Leather Stuff have agreed on a transfer price of $3.25. What is the total benefit for Style? $243,000 $292,500 $168,300 $69,000 $81,000

Answer 1

$ Direct Material 0.23 $ Direct Labour 0.20 Variable Oerheads $ 0.95 $ Total Variable Costs 1.38 Styles's capacity 9,50,000 zippers Less: Current utilisation 6,20,000 Spare Capacity 3,30,000 Leather's stuff requirement 90,000 Solution 26. As requirements of Leather stuff is within the spare capacity of Style Style would require a minimum of its Variable costs as its Transfer Price. Thus Floor (Minimum Transfer price) will be decided by Style @ $1.38 per zipper Option E- $1.38; Style is the correct answer Solution 27. Price paid by Leather stuff Outside Less: Agreed Tansfer Price $ 3.50 $ 3.25 (a) $ (b) (axb) $ Savings per zipper 0.25 No of zipper purch 90000 zippers Total Savings 22,500 Option A- $22,500 is the correct Answer Solution 28. = $ Agreed Tansfer Price 3.25 $ Less: Variable Cost 1.38 (a) $ Benefit 1.87 No of Zipper transferred Total Savings 90000 zippers (b) (axb) $ 1,68,300 Option C- $168,300 is the correct Answer

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