At least one division will be made better off and

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Unformatted text preview: division will be made better off, and firm profits will increase. 22. EVA is the difference between after-tax operating income and the total annual cost of capital. 17. price is the one that makes the buying division no worse off. 20. The opportunity cost approach to transfer pricing identifies the minimum and maximum transfer prices. The minimum transfer price is the one that makes the transferring division no worse off, and the maximum transfer 322 EXERCISES 10-1 Cost center – Total cost Profit center – Operating income Revenue Center - Sales Investment center - Return on Investment 10–2 1. Direct materials Direct labor Variable overhead Fixed overhead Total Total Cost $ 120,600 90,000 26,400 68,000 $ 305,000 Per Unit $ 6.03 4.50 1.32 3.40 $ 15.25 Cost of ending inventory = $15.25 × 650 = $9,912.50 2. Direct materials Direct labor Variable overhead Total Total Cost $ 120,600 90,000 26,400 $ 237,000 Per Unit $ 6.03 4.50 1.32 $ 11.85 Cost of ending inventory = $11.85 × 650 = $7,702.50 3. Since absorption costing is required for external reporting, the amount reported would be $9,912.50. 323 10–3 1. Fixed overhead rate = $107,500/25,000 = $4.30 per unit The difference is computed as follows: Fixed overhead rate(Production – Sales) $4.30(25,000 – 23,000) = $8,600 2. a. Lextel, Inc. Variable-Costing Income Statement For the Year Ended December 31, 2008 Sales (23,000 × $26) ........................................ Less variable expenses: Cost of goods sold (23,000 × $12.80) ...... Selling (23,000 × $4) .................................. Contribution margin ....................................... Less fixed expenses: Overhead .................................................... Selling and administrative ........................ Operating income ........................................... b. $ 598,000 $ 294,400 92,000 $ 107,500 26,800 386,400 $ 211,600 134,300 $ 77,300 Lextel, Inc. Absorption-Costing Income Statement For the Year Ended December 31, 2008 Sales ...............
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