2 assuming no available capacity and that the new

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Survey of Accounting
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Chapter 12 / Exercise E12-10
Survey of Accounting
Warren
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transfer price, the offer should be accepted.2.Assuming no available capacity, and that the new units produced would be equal to the number of standard units forgone, variable cost of the special cell phone would be ($40 + $30) or $70 and the opportunity cost would be ($80 – $40) or $40. Therefore, the minimum transfer price would be $110 = $70 + $40. Since this is higher than the $90 transfer price, Spirit Manufacturing should reject the offer.3.Assuming no available capacity, and that in order to produce the 20,000 special cell phones, 30,000 standard cell phones would be forgone, the minimum variable cost would be ($40 + $30) or $70 and the opportunity cost would be:Total contribution margin on standard cell phones($80 – $40) × 30,000—————————————————————— =—————————— = $60Number of special cell phones$20,000Therefore, the minimum transfer price would be $130 = ($40 + $30) + $60. Since the $140 transfer price being offered exceeds the minimum transfer price of $130, Spirit Manufacturing should accept the offer.
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Survey of Accounting
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Chapter 12 / Exercise E12-10
Survey of Accounting
Warren
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Test Bank for Managerial Accounting, Fifth EditionEx. 175Pubworld is a textbook publishing company that has contracts with several different authors. It also operates a printing operation called Printpro. Both companies operate as separate profit centers. Printpro prints textbooks written by Pubworld authors, as well as books written by non-Pubworld authors. The printing operation bills out at $0.06 per page and a typical textbook requires 600 pages of print. A developmental editor from Pubworld approached the printing operation manager offering to pay $0.035 per page for 5,000 copies of a 600-page textbook. Outside printers are currently charging $0.04 per page. Printpro's variable cost per page is $0.03.Instructions1.Calculate the appropriate transfer price and indicate whether the printing should be done internally by Printpro under each of the following situations:a.Printpro has available capacity.b.Printpro has no available capacity and would have to cancel an outside customer's job to accept the editor's offer.2.Calculate the change in contribution margin for each company, if top management forces Printpro to accept the $0.035 transfer price when it has no available capacity.Ans: N/A, SO: 4, Bloom: AN, Difficulty: Medium, Min: 13, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business EconomicsSolution 175(13 min.)1a.Assuming that the printing operation has available capacity, the printing operation's variable cost is $0.03 and its opportunity cost is $0. The minimum transfer price would be $0.03 = $0.03 + $0. Therefore, in this case, the printing operation should accept the offer to print internally. The $0.035 transfer price would provide a contribution margin of $0.005 ($0.035 – $0.03) per page. Depending on its bargaining strength, the printing operation might want to ask for a transfer price higher than $0.035, since the company is saving money at any price below the $0.04 price charged by outside printers.1b.Assuming no available capacity, the printing operation's variable cost is $0.03 per page and its opportunity cost is $0.03 ($0.06 – $0.03) per page. The minimum transfer price would be

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