Question

Stavos Company’s screen Division manufactures a standard screen for high-definition televisions (HDTVs). The cost per screen follows:

Variable cost per screen	$	117
Fixed cost per screen		27	*
Total cost per screen	$	144

*Based on a capacity of 770,000 screens per year.

Part of the Screen Division’s output is sold to outside manufacturers of HDTVs and part is sold to Stavos Company’s Quark Division, which produces an HDTV under its own name. The Screen Division charges $183 per screen for all sales.

The costs, revenue, and net operating income associated with the Quark Division’s HDTV are given below:

Selling price per unit			$	581
Variable cost per unit:
Cost of the screen	$	183
Variable cost of electronic parts		239
Total variable cost				422
Contribution margin				159
Fixed costs per unit				81	*
Net operating income per unit			$	78

*Based on a capacity of 250,000 units per year.

The Quark Division has an order from an overseas source for 5,200 HDTVs. The overseas source wants to pay only $401 per unit.

Required:

1. Assume the Quark Division has enough idle capacity to fill the 5,200-unit order. Is the division likely to accept the $401 price or to reject it?

2. Assume both the Screen Division and the Quark Division have idle capacity. Under these conditions, what is the financial advantage (disadvantage) for the company as a whole (on a per unit basis) if the Quark Division rejects the $401 price?

3. Assume the Quark Division has idle capacity but that the Screen Division is operating at capacity and could sell all of its screens to outside manufacturers. Under these conditions, what is the financial advantage (disadvantage) for the company as a whole (on a per unit basis) if the Quark Division accepts the $401 unit price.

Answer 1

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Requirement - 1
Division individually will be reluctant to accept the order as variable cost only for the division is more than the price quoted by the overseas source.
Requirement - 2
Offered Selling Price		$       401
Less: Variable Cost
Electronic Parts-Quark Division	$       239
Screen Division Variable Cost	$       117
Total Variable Cost		$       356
Financial Disadvantage of rejecting		$        -45	per Unit
Requirement - 3
Offered Selling Price		$       401
Less: Variable Cost
Electronic Parts-Quark Division	$       239
Screen Division Variable Cost	$       117
Screen Division Contribution Lost (working-1)	$         66
Total Variable Cost		$       422
Financial Disadvantage of accepting		$        -21	per Unit
Working-1
($183 Selling Price-$117 VC)