The Molding Division of Cotwold Company manufactures a plastic casing used by th
ID: 2569744 • Letter: T
Question
The Molding Division of Cotwold Company manufactures a plastic casing used by the Assembly Division. This casing is also sold to external customers for $44 per unit. Variable costs for the casing are $31 per unit and fixed cost is $6 per unit. Cotwold executives would like for the Molding Division to transfer 27,000 units to the Assembly Division at a price of $38 per unit. Assume that the Molding Division has enough excess capacity to accommodate the request. Required 1. Should the Molding Division accept the $38 transfer price proposed by O Yes O No 2. Calculate the effect on Molding Division's net income if it accepts the $38 transfer price Net IncomeExplanation / Answer
1.YES.
Molding division should accept the $38 transfer price, since it is greater than the variable costs of $31 per unit, and molding division has enough excess capacity to accomodate the request.
2. effect on net income = (transfer price - variable cost) * number of units
=>($38 - $31) *27,000
=>$189,000.
Net Income $189,000 Increase