Question

QUESTION 12

1. The Dubs division of Fast Company (the parent company) produces wheels for off-road sport vehicles. One-half of Dub's output is sold to the Hoon division of Fast; the remainder is sold to outside customers. Dub's estimated operating profit for the year is shown in the table.

   	Internal Sales	External Sales	Totals
   Sales	$300,000	$400,000	$700,000
   Var Mfg.	$160,000	$160,000	$320,000
   Var G&A	$40,000	$60,000	$100,000
   CM	$100,000	$180,000	$280,000
   Fixed Mfg.	$24,000	$32,000	$56,000
   Fixed G&A	$36,000	$48,000	$84,000
   Op. Profits	$40,000	$100,000	$140,000
   Unit Sales	1,000	1,000	2,000

   Unless otherwise stated assume the fixed costs given above are allocated costs and unavoidable. Hoon division has an opportunity to purchase 1,000 wheels of the same quality from an outside supplier on a continuing basis for $250.00 per wheel.

   Assume the Dubs division has excess production capacity but can only sell 1,000 units to external customers. What would be the Dubs division’s total operating profit if it agrees to meet the $250.00 price for transfers to the Hoon division?

Answer 1

If Dubs division agrees to for transfer price of $250.00 per wheel to Hoon division, then the operating profit from internal sales would reduce by (1000*50) = $50,000

There would be no change in variable costs or fixed costs in both the divisions due to such price reduction.

So, the overall decrease in total operating profit of Dubs Division shall be $ 50,000. Hence, the revised operating profit shall be $90,000 (140000-50000).

The computation is attached for reference-

Internal Sales External Sales Total Sales $ 250,000 $ 400,000 $ 650,000 (1000*250) Variable manufacturing $ 160,000 $ 160,000 $ 320,000 Variable G&A $ 40,000 $ 60,000 $ 100,000 |СМ $ 50,000 $ 180,000 $ 230,000 Fixed Mfg. $ 24,000 $ 32,000 $ 56,000 Fixed G&A $ 36,000 $ 48,000 $ 84,000 Operating Profits $ (10,000) $ 100,000 $ 90,000