Division A of Tran Electronics manufactures screens used in HDTVs. It sells its
ID: 2594505 • Letter: D
Question
Division A of Tran Electronics manufactures screens used in HDTVs. It sells its one product, a standard screen, for $210 per screen. Variable costs are $90 per screen, and allocated fixed costs amount to $95 per screen. Division B has asked Division A to supply 5,000 custom-made screens. These custom-made screens have a variable cost of $105 per unit. Division A believes that both screens would consume the same amount of capacity to make. Division A currently has the capacity to make 20,000 screens annually.
Show your labelled computations for minimum price per custom screen that Division A can set for this transfer and not have its profit fall below the current level.
6-1. Division A is currently making 12,000 screens.
6-2. Division A is operating at capacity.
6-3. Division A is making and selling 16,000 standard screens currently. Division B wants to buy all 5,000 screens from Division A or none at all.
Explanation / Answer
Answer 6-1. Division A is currently making 12,000 screens.
Note : Maximum capacity = 20,000 screens annually. ; Currect Production = 12,000 screens.Thus Division have excess capacity left of 8,000 units . This means that there is no oppertunity cost involve in transfering units to Division B. Thus to maintain the current profit level Division A must charge only Variable cost of custom made screen from Division B.
Answer 6-2. Division A is operating at capacity.
Note : Maximum capacity = 20,000 screens annually. ; Currect Production = 20,000 screens. Thus there is no excess capacity left with Division A . Therefore to tranfer the costom made screen to Division B , Division A have to sacrifice the contribution per unit from from its regular sales for the per unit transfer to Division B . Such contribution margin lost is called oppertunity cost
Answer 6-3. Division A is making and selling 16,000 standard screens currently. Division B wants to buy all 5,000 screens from Division A or none at all.
Note : Maximum capacity = 20,000 screens annually. ; Currect Production = 16,000 screens. Thus there is only 4,000 units of excess capacity left with Division A whereas the order of Division B is of 5,000 units . Therefore to tranfer the costom made screen to Division B , Division A have to sacrifice the contribution of 1,000 units from its regular sales . Such oppertunity cost should be charged to each unit tranfer to Division B
Oppertunity Cost per unit : Contribution for 1,000units / 5,000 units
($120 * 1,000 units) / 5 ,000 units
Particular Amount ($) Variable cost of per unit of custom made screen 105 Oppertunity Cost 0 Minimum price per custom screen $105 per unit