Question

Assume you are the department B manager for Marley's Manufacturing. Marley's operates under a cost-based transfer structure. Assume you receive the majority of your raw materials from department A, which sells only to department B (they have no outside sales).

The income statement for Marley's Manufacturing is shown below:

Marley's Manufacturing Income Statement Month Ending August 31, 2018
	Dept. A		Dept. B
Sales	$21,000		$52,000
Cost of goods sold	10,080		27,040
Gross profit	$10,920		$24,960
Utility expenses	1,050		3,120
Wages expense	5,250		10,920
Costs allocated from corporate	2,310		15,080
Total expenses	$8,610		$29,120
Operating income/(loss) in dollars	$2,310		-$4,160
Operating income/(loss) in percentage	11	%	-8	%

Assume the market price for the items your department purchase is 15% below what you are being charged by department A of Marley’s Manufacturing.

Determine the operating income for department B, assuming department A “sold” department B 1,000 units during the month and department A reduces the selling price to the market price. Round your percentage answer to one decimal place.

New operating income/(loss) for department B in dollars
New operating income/(loss) for department B in percentage

Answer 1

For the computation of new operating income/loss for department B in dollar and percentage first, we need to follow some steps which are shown below:-

Step 1:

Direct cost other than material = Cost of goods sold of B - Current purchase
= $27,040 - $21,000
= $6,040

Step 2:
Current selling price = Sales of Dept. A / Number of units sold to B
= $21,000 / 1,000
= $21

Step 3:
New selling price = Current selling price * Remainning percentage
= $21 * 75%
= $15.75

Step 4:
New purchase value = New selling price * Number of units sold to B
= $15.75 * 1,000
= $15,750

Step 5:
New cost of goods sold = Direct cost other than material + New purchase value
= $6,040 + $15,750
= $21,790

Step 6:
Total expenses = New cost of goods sold + Other expenses
= $21,790 + $29,120
= $50,910

finally
Operating income in dollars is

= Sales - Total expenses
= $52,000 - $50,910
= $1,090

and
Operating income in percentage is

= Operating income * 100 / Sales
= $1,090 * 100 / $52,000
= $109,000 / $52,000
= 2.1%

So, the new operating income in dollars is $1,090

and the new operating income in percentage is 2.1%