Question

Gundawindi Limited has many divisions that are evaluated on the basis of ROI. One division, Centra, makes boxes. A second division, Mantra, makes chocolates and needs 80,000 boxes per year. Centra incurs the following costs for one box: Direct materials $0.35 Direct labour $0.60 Variable overhead Fixed overhead Total $1.48 $0.40 $0.13 Centra has capacity to make 700,000 boxes per year. Mantra currently buys its boxes from an outside supplier for $1.80 each (the same price that Centra receives). 23. Assume that Gundawindi mandates that any transfers take place at full manufacturing cost. What would be the transfer price if Centra transferred boxes to Mantra? $1.35 $1.48 $1.00 Cannot be determined from the information given. $0.90 24. Assume that Gundawindi allows division managers to negotiate transfer price. Centra is producing 600,000 boxes. If Centra and Mantra agree to transfer boxes, what is the ceiling of the bargaining range and which division sets it? $1.48; Centra $1.35; Centra B.

Answer 1

$ Direct Material 0.35 $ Direct Labour 0.60 $ Variable Oerheads 0.40 $ Total Variable Costs 1.35 $ Fixed Overhead 0.13 1.48 Solution 23. Gundawindi mandates any transfer to take place at full manu turing cost. Transfer price charges by Centra to Mantra will be: If full capcity is being utlised then at $1.48 per unit if Spare capacity is available, then at $1.35 per unit but in this question, information is missing, hence Answer should be D Cannot be determined from the information given Solution 24 Centra full capacity 700000 boxes Current Utilisation 600000 boxes Spare capacity 100000 Qty required 80000 boxes Therefore, minimum(flooring) transfer price will be $1.35 per box Maximum (Ceiling) will be $1.48 per box Correct answer should be A.$1.48 - Centra

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