Division L at Reiner Ltd. manufactures 17686 units of part #70, which it current
ID: 2557144 • Letter: D
Question
Division L at Reiner Ltd. manufactures 17686 units of part #70, which it currently sells to outside customers. Selected data for part #70 are given below:
Unit selling price to outside customers
$90.81
Variable production cost per unit
57.70
Variable selling and administrative expense per unit
11.22
Total fixed production cost (based on a capacity of 19091 units per year)
$380000
Division K at Reiner Ltd. currently purchases 7621 units of part #70 from an outside supplier at a price of $85.91. Consideration is being given to buying internally rather than from the outside supplier. If an internal transfer takes place, it has been determined that variable S&A expense would be cut by one quarter for any sales made to Division K.
Assume the two divisions agree on a transfer price of $79.01. What is the incremental income to division L if a transfer takes place?
Select one:
a. $-37795
b. $67517
c. $-59172
d. $52585
Division A has the capacity for making 2820 motors per month and regularly sells 1929 motors each month on the intermediate market at a contribution margin of $63.46 per motor. A sister division, Division B, would like to obtain 1403 motors each month from Division A. In computing a transfer price per motor using the transfer pricing formula, the lost contribution margin per unit portion of the transfer price computation would be:
Select one:
a. $63.46
b. $34.74
c. $46.32
d. $23.16
Unit selling price to outside customers
$90.81
Variable production cost per unit
57.70
Variable selling and administrative expense per unit
11.22
Total fixed production cost (based on a capacity of 19091 units per year)
$380000
Explanation / Answer
Answer 1
Total Contribution Earlier (withhout interna transfer) = 17,686 * 21.89 = 387,146.50
If internal transfer to Division K is done:
Total Capacity of Division L = 19,091 units
Internal transfer to Division K = 7,621 units
Units Sold to Outside market = 11,470 units
Contribution on units sold to outside market = 11,470 * 21.89 = 251,078
Contribution on units transferred to Division K = 7,621 * 12.895 = 98,272.80
Total Contribution earned = 349,351
Net Decrease in Contribution = 349,351 - 387,146 = (37,795) Option A
Working:
Calculation of Contribution:
Answer 2:
Total Contribution earned by outside sales (With no internal transfer) = 1929 * 63.46 = 122,414
Total Capacity = 2820 units
Units transferred to division B = 1403
Units that can be sold to outside market = 2820 - 1403 = 1417
Contribution earned from outside sales = 1417 * 63.46 = 89,922
Remaining Contribution to be earned from internal transfer of 1403 units= 122,414 - 899,22 = 32,491
Lost contribution margin per unit portion of the transfer price = 32,491 / 1403 = $ 23.16 per unit - Option D
Outside Sales Internal Transfer Selling Price 90.81 79.01 Variable Production Cost 57.70 57.70 Variable Selling & Admin Cost 11.22 8.415 Contribution 21.89 12.895