Question

Southwest Division offers its product to outside markets for $46. It incurs variable costs of $32 per unit and fixed costs of $45,500 per month based on monthly production of 5,600 units. Northeast Division can acquire the product from an alternate supplier for $63 per unit or from Southwest Division for a transfer price of $46 plus $4 per unit in transportation costs. Required: a. What are the costs and benefits of the alternatives available to Southwest Division and Northeast Division with respect to the transfer of Southwest Division's product? Assume that Southwest Division can market all that it can produce. b. How would your answer change if Southwest Division had idle capacity sufficient to cover all of Northeast Division's needs? a. Net benefit per unit per unit b. Net benefit

Answer 1

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Southwest & Northwest a) When south west has full demand for product produced Southwest - Sale price or $46 Less: Variable cost $ 32 Contribution sunit (x Units sold - Total contribution Lese' Fixed Cost $14 5600 $78400 (14x5000) $45500 Net benefit $32900 Northwest Buy component faom Outsiders - $63 Less: Bought from southwest - Transfer price - $46 Add: Transpost - $4 - $50 Nel benefit Iunil $13 Note: The southwest has full demand on product. Thus it will not sell/transfer to Northwest below its market price

b) Ik soulhwest division base excess capacity to cater Northwest Note: If southwest has excess capacity, it will try to recover variable cost from divisional transfer. Thus it will not benefit south west to earn profit but help Northwest to earo more profit due to reduction in cost Southwest: It will transfer proceset @ variable cost i. $32 North west : $63 Buy from outsider - Less! Buy n southwest Transfeg. poule - $32 absold: Transport cost - $4 - - Net benefit unit $36 $3 $27 Summary a b) for Northwest Net Benefit - $13 per unit Net Benefit - $27 per unit

Trans Atlantic c) If us division purchased foom Finland clivision USA and $ (million) Rovenue lo tilanna less operating expenses Less i foraging material (transfered from $155. ($60.5) ($30.5) که معلم Bele income before tax $64 less : Tax 30% (64X30%) Net profit $44.8 Finland $(million $30.5 $20.5 $10 Revenue from selling to USA division leggi operating expenses Income before taxe Less: Tax @ 70% ($10x70%) Net profita की

Total profit as a company (incl both diy) USA division profit - $44.8 Finland division profit -> $3 Total profit $47.8 b) If USA division purchased from Independent supplier USA Roo $(million) Rovenue $155 Lese: Operating expens Less: metal from independend supplies ($40.5) Income before tax $54 Less Tax 302 ($16:2) $54x304) $37.88 C$60.5) No implication in Finland Summary: Tax liability 30. 5 million 40.5 million Tax ability USA Finland $16.2m $19.20 $7m $26.2m Total tax liability $16.2m