Question

Branded Shoe Company manufactures only one type of shoe and has two divisions, the Stitching Division and the Polishing Division. The Stitching Division manufactures shoes for the Polishing Division, which completes the shoe and sells it to retailers. The Stitching Division "sells"shoes to the Polishing Division. The market price for the Polishing Division to purchase a pair of shoes is $42. (Ignore changes in inventory.)   Stitching's costs per pair of soles are: Direct materials $10 Direct labor $ 8 Variable overhead $ 6 Division fixed costs $ 4 Polishing's costs per completed pair of shoes are: Direct materials $14 Direct labor $ 6 Variable overhead $ 4 Division fixed costs $16 7. Calculate and compare the difference in overall corporate net income of Branded Shoe Company between Scenario A and Scenario B if the Polishing Division sells 100,000 pairs of shoes for $120 per pair to customers. Scenario A: Negotiated transfer price of $30 per pair of soles Scenario B: Market-based transfer price A) $1,000,000 more net income under Scenario A B) $1,000,000 of net income using Scenario B C) $200,000 of net income using Scenario A. D) The net income would be the same under both scenarios. 8. Assume the transfer price for a pair of shoes is 180% of total costs of the Stitching Division and 40,000 of soles are produced and transferred to the Polishing Division. The Stitching Division's operating income is ________. A) $896,000 B) $720,000 C) $800,000 D) $880,000 9. If the Polishing Division sells 100,000 pairs of shoes at a price of $120 a pair to customers, what is the operating income of both divisions together? (Assume that the Stitching Division has no other customers) A) $8,800,000 B) $6,800,000 C) $6,000,000 D) $5,200,000

Answer 1