15-102
117.
15-103
15-104
118.
15-105
119.
Calvin Machinery Company manufactures heavy-duty equipment used in foundries, mining
operations, and similar operations. The company is very decentralized, with various
division managers having control over capital investments and most production decisions.
The Cylinder Division fabricates a component which is used by the Press Division in its
production of metal presses. The Cylinder Division has been selling to the Press Division
at a price of $3,000 per unit. Because of a cost increase, the Cylinder Division wants to
increase its price to $3,200, even though the Press Division can still purchase an
equivalent component externally for $3,000. The following information has been gathered
regarding this issue:
Press Division’s annual
purchases
100 units
Cylinder Division’s variable costs
$2,400 per
unit
Cylinder Division’s fixed costs
$600 per unit
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120.
The GrowPro Manufacturing Company has a division (Division P) that produces an
essential ingredient used by the Lawn Division in making lawn fertilizer. Historically, 75%
of Division P‘s output has been purchased by Division L and 25% has been sold to other
fertilizer companies. The transfer price between Division P and Division L has been based
on the outside sales price less selling and administrative expenses directly applicable to
the outside sales. Last year, the transfer price was $35 per ton; Division P would like the
same transfer price this year. However, the general manager of Division L has found an
outside supplier who will sell the ingredient for $30 per ton. She would like to continue
buying from Division P, but Division P’s manager does not want to match the $30 price
because he thinks that the margin is too small. Top management does not get involved in
transfer pricing disputes, but rather, allows division managers to make their own decisions
concerning internal or external purchases and sales.
The following information has been gathered regarding Division P‘s operations last year:
Sales to L
External
$4,200,000
$2,000,000
3,000,000
1,000,000
360,000
120,000
The information presented above is based on selling 120,000 tons internally and 40,000
tons externally.
Required:
a. If Division L buys externally, Division P can increase its current external sales by only
20,000 tons. What arguments can the general manager of Division L make to help Division
P to match the $30 price?
b. Division L wants to use only one supplier, so Division P will either sell 120,000 tons to
Division L or nothing. If Division L‘s capacity is 160,000 tons, how many units does
Division P need to sell to outsiders at $50 per ton before it is better off selling to
outsiders? Ignore any additional marketing costs which would be incurred to increase
sales.
15-108
a. Drop price internally, overall profit = $1,120,000; lose inside sales, increase outside,
overall profit = $1,020,000.
b. 64,000 tons.
121.
The Measurement Division of Flow Co. produces pumps which it sells for $20 each to
outside customers. The Measurement Division’s cost per pump, based on normal volume
of 500,000 units per period, is shown below:
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Variable costs
$12
Fixed overhead
3
Total
$15
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122.
15-112
15-113
123.
15-115
124.
Farris Yard Equipment Corporation manufactures lawn mowers and snow blowers. It also
manufactures engines that are used by the Lawn Mower Assembly Division (LMAD). The
Engine Division (ED) also sells about 40% of its output to the outside market (these are
multipurpose engines). Its annual capacity is 150,000 units and annual output 135,000
units. All engines sold internally to the LMAD are priced at cost plus 20% markup.
In January 2016, the Snow Blower Assembly Division (SBAD) approached the ED to ‘buy’
20,000 engines. Diane Rogers, the controller of ED, computed the costs of manufacturing
these engines as follows:
Total
Per unit
Materials
$300,000
$15.00
Labor
400,000
20.00
Special equipment
36,000
1.80
Quality inspection
24,000
1.20
Other manufacturing costs
350,000
17.50
Total costs
$1,110,000
$55.50
Rogers quoted a price of $66.60 for each engine transferred to the SBAD. Jackson White,
the manager of SBAD, was furious to note that the ED was “trying to make money off a
sister division.” He argued that the price must include only the cost of materials, as all
other costs will be incurred irrespective of whether or not SBAD places the order for
20,000 engines. Morton Downey, the production manager of ED, pointed out that the
special equipment will be purchased only for fulfilling this internal order. Moreover, he
argued that inspection must also be done just like on all other engines; therefore, the
inspection costs must also be included. Labor is paid a flat monthly salary. Other
manufacturing costs include both variable and fixed components (in roughly equal
proportion).
Required:
(a) Given that excess capacity exists, what is the minimum price that the ED must charge
to the SBAD?
(b) What are the pros and cons of internal sourcing?
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125.
Allentown Division of Sparks Inc. transfers its product to the Youngstown Division. The
Youngstown Division can either buy the item internally or externally (cost = $73 each).
The Allentown Division has just completed its annual cost update as follows:
Direct material
$25.00
Direct labor
18.00
Variable manufacturing
overhead
6.00
Fixed manufacturing
overhead
3.50
Variable selling
expenses
4.00
Fixed selling and
administrative expenses
8.50
Total costs
$65.00
Desired return
14.00
Sales price
$79.00
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126.
The following costs exist for Wiring Division of Corriander Corp.
Direct material
$67,500
Direct labor
45,000
Manufacturing overhead (25%
variable)
45,000
Operating expenses (30%
variable)
75,000
Output
30,000
Units
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127.
SEMO Inc. has a division located in Spain and another in the U.S. The Spanish division
produces a part needed for the product made by the U.S. division. There is substantial
excess capacity in the Spanish division. The tax rate of the Spanish division is 35% and
U.S. division tax rate is 30%.
The part sells externally for $75 and the Spanish division’s manufacturing costs are:
Direct material
$32
Direct labor
12
Variable overhead
6
Fixed overhead
19
128.
The following information is available for the two divisions of MAC Co.:
Division A
Selling price to outside market
$55
Standard unit-level costs
35
Division B
Selling price of finished product
$95