Chapter 11 Sol - Part 1 - Exercise115(20minutes 1 DivisionA...

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Exercise 11-5  (20 minutes) 1. Division A Division B Total  Company Sales ............................. $10,500,000 1 $7,200,000 2 $15,600,000 3 Expenses: Added by the division. 7,800,000 3,600,000 11,400,000 Transfer price paid ......                                     2,100,000                                 Total expenses ..............   7,800,000       5,700,000       11,400,000     Operating income .......... $2,700,000 $      1,500,000     $4,200,000 1 20,000 units  ×  $525 per unit = $10,500,000. 2 4,000 units  ×  $1,800 per unit = $7,200,000. 3 Division A outside sales (16,000 units  ×  $525 per unit)... $8,400,000 Division B outside sales (4,000 units  ×  $1,800 per unit). .   7,200,000     Total outside sales ........................................................... $15,600,000 Observe that the $2,100,000 in intra-company sales has been  eliminated from both sales and expenses. 2. Division A should transfer the 1,000 additional units to Division  B. Note that Division B’s processing adds $1,275 to each unit’s selling  price (B’s $1,800 selling price, less A’s $525 selling price = $425  increase), but it adds only $900 in cost. Therefore, each component  transferred to Division B ultimately yields $375 more in contribution  margin ($1,275 – $900 = $375) to the company than can be obtained  from selling to outside customers. Thus, the company as a whole will  be better off if Division A transfers the 1,000 additional components to  Division B.
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Exercise 11-12  (30 minutes) 1. a. The lowest acceptable transfer price from the perspective of the  selling division, the Electrical Division, is given by the following  formula: Total contribution margin   on lost sales Variable cost Transfer price +  per unit Number of units transferred Because there is enough idle capacity to fill the entire order  from the Motor Division, there are no lost outside sales. And  because the variable cost per unit is $21, the lowest acceptable  transfer price as far as the selling division is concerned is also  $21. Transfer price   $21 + $0/10,000 = $21 b. The Motor Division can buy a similar transformer from an  outside supplier for $38. Therefore, the Motor Division would be  unwilling to pay more than $38 per transformer.  Transfer price   Cost of buying from outside supplier = $38 c. Combining the requirements of both the selling division and the 
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