Question

Answer questions 8 and 9 using the following information: Soft Cushion Company is highly decentralized. Each division is empowered to make its own sales decisions. The Assembly Division, which makes cushions, can purchase stuffing, a key component, from the Production Division or from external suppliers. The Production Division's variable cost is $32 per pound of stuffing. One pound of stuffing is needed for one cushion. The Assembly Division can buy the same quality of stuffing from a reliable outside supplier for $50. The Production division has the monthly capacity to produce stuffing for the 20,000 cushions that the Assembly division needs. If the Assembly Division chooses to buy the stuffing from the outside supplier, the Production division can utilize its facilities for other production operations that would result in monthly cash-operating savings of $300,000. Assume that the total fixed costs for the Production division will not change whether the facilities were used to produce stuffing or for other production operations. 8) What is the monthly operating advantage (disadvantage) to Soft Cushion company as a whole, if the Assembly division buys the stuffing from the production division instead of buying from the outside supplier? A) $60,000 B) $700,000 C) $100,000 D) S(400,000) 9) The minimum transfer price per pound of stuffing that the Production division should charge the Assembly division is: A) $50 B) $32 C) $47 D) $30

Answer 1

(8) Monthly advantage to soft cushion company as a whole, when assembly division by stuffing from production division, instead from outside market- (a) 60,000 $.

It is calculated as follows:-

Cost of buying from outside market= 20,000 * 50= 1,000,000

Cost of buying from production division= {(20000*32) + 300,000]= 940,000

Saving to company= 1,000,000- 940,000= 60,000 $

(9) Minimum transfer price that production division should charge- (c) 47 $

It is calculated as follows:-

Minimum transfer price= 32 + 300,000/20,000= 47 $ per pound of stuffing