Question

1. Sonic Electronics operates as a decentralized company. The company has two divisions Battery and Camera. Battery division annual capacity is 90,000 units of battery charger which are sold internally and externally. The revenue and costs associated with the production of one battery charger:

Selling price to external customers           $ 23

Variable manufacturing cost                           12

Fixed cost per unit (based on capacity)       4

Variable selling cost per unit                             3

Fixed selling                                                        $360,000

The camera division would like to purchase 27,000 units of battery chargers. Currently the division can purchase the battery charger from an overseas supplier at $ 18 per unit.

Required:

1. Assuming the Battery division is currently producing and selling 54,000 units. The manager of the camera division offers to pay $17.50 for the battery charger. Should battery division accept the $17.50 offer. What is the impact on Sonic Electronics net income if the transfer price is accepted?

2. Assuming the Battery division is currently producing and selling 75,000 units. The manager of the camera division offers to pay $17.50 for the battery charger. Should battery division accept the $17.50 offer. What is the impact on Sonic Electronics net income if the transfer price is accepted? Would management of Sonic Electronics want the transfer?

Answer 1

solution Requeirement la) The Battery division Operates at 54000 which means there is no opportunity cost Ciney 90000 -54000 - 36000 < 27000) cenit. Minimum ve Marinum. Buyer's incremental opport- (valiable. now tunity " = < .TP < willingness to cost) lo Cosly pay: Crotal price ) $12+3+ oHo . $17.50 The range : 415 < TP < .$17.50 : The Battery division should accept the offer to transfer the battery Chargers at 4 17.50 . At this price, the battery division still can cover Some of its fined cost : Requirement (b). The Battery division operates 75000 units, ishich means there is an opportunity wsta The opportunity cost to give up $ (or) units sold to external customers, computations & Total requeirement : current capacity + camera division 27000 +45000 = 102000 cenits opportunity.cost : 102000 -90000 - 12000 units contribution Maegin loss = 888 12000 = $96000 ($23-$15) unih - request

Marirnum Contribution Margin lose is to spread among the number of curls trameferred $.96000 À 27000 unih =) $3.56 per cenit Minimum vc + incremental opportu. Cost * nity C P= Beyer's willingness Costel to pay 12+ 3) + 0 + $3.56 s TP < $19:50 The range ; 18.56 $.tp $ $17.50 i, 2, 18:54 > 50 Hence, the Battery division should not accept the offer to transfer the battery chargers at $17.50 If company amph the offer then the loss of $ 28620 [(18-56-1905) x 27000)=) (1.068 27000) will occur.