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Which is the correct answer on the 3 questions below? Division 1 of Ace Company makes and sells...

Question:

Which is the correct answer on the 3 questions below?

Division 1 of Ace Company makes and sells wheels that can either be sold to outside customers or transferred to Division 2. The following data are available from last month:

Division 1
Selling price per wheel to outside customers $50
Variable cost per wheel when sold to outside customers $35
Capacity in wheels 15,000

Division 2
Number of wheels needed per month 5,000
Price per wheel paid to an outside supplier $47

If Division 1 sells the wheels to Division 2, Division 1 can avoid $2 per wheel in sales commissions.

Suppose that Division 1 sells 7,500 units per month to outside customers. What is the lowest acceptable transfer price from the viewpoint of the selling division if Division 2 requires 5,000 units per month from Division 1?

a) $33

b) $35

c) $47

d) $50

What is the maximum price per wheel that Division 2 should be willing to pay Division 1 if a transfer were to take place?

a) $33

b) $35

c) $47

d) $50

Suppose that Division 1 sells 15,000 units each month to outside customers, what is the lowest acceptable transfer price from the viewpoint of the selling division?

a) $48.00

b) $43.50

c) $37.50

d) $34.73

Variable Cost

Variable cost is the cost incurred at the time of production. The amount of variable cost varies with the quantity of produced products. The variable cost plus the fixed cost gives the total cost of production.

Answer and Explanation:

Suppose that Division 1 sells 7,500 units per month to outside customers. What is the lowest acceptable transfer price from the viewpoint of the selling division if Division 2 requires 5,000 units per month from Division 1?

The correct answer is a) 33

Reason: The variable cost of Division 1 for outsiders is 35. But Division 1 can avoid $2 on the selling of wheel to Division 2 as given in the question.

What is the maximum price per wheel that Division 2 should be willing to pay Division 1 if a transfer were to take place?

The correct answer is c) $47

Reason: Division 2 can purchase the wheel from outside supplier at price 47. So, on purchasing wheel from Division 1, it will not pay more than 47.

Suppose that Division 1 sells 15,000 units each month to outside customers, what is the lowest acceptable transfer price from the viewpoint of the selling division?

The correct answer is a) $48

Reason: Cost of production is 50 with the variable cost of 35 for outside. Thus, the contribution will be 15 (50-35). The lowest acceptable cost can be variable cost for division 2, 33, plus the contribution cost, 15, that is 48. The cost of selling wheel to Division 2 on place of outside customer is 15, the contribution cost. Therefore, Division 1 will cover its variable cost with the opportunity cost of 15 also.


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