Question

The ...Northwest ...Division of ...Kebalo Electric.. produces ..hydroelectric ...power. The power

plant has seven machines that can harvest hydroelectric power on a continuous

process such that the capacity of the plant is 5,000 machine hours per month. The

plant produces three types of electric power. Energy type "Standard" is not easily

stored, energy type "Super" is easier to store and send to more remote regions, and

energy type "Bad" has no external market. However, energy type "Bad" is easily

transferred to the Southwest Division of Kebalo Electric where it can be transferred

into a marketable energy source by the Southwest Division. The Southwest Division

can further process the "Bad" energy at a variable cost of $1 per unit and sell it for $5

per unit. The selling price for the energy types are as follows (note: a unit of energy is

a kilowatt-hour):

"Super" "Standard" "Bad"

Selling Price/unit 6 3.5 --

Variable Cost/unit 2 1 3

Total Fixed Cost $15,000

Machine hours/unit 0.5 0.25 1

The external demand for each energy source in units (kilowatt-hours) is as follows:

"Super" "Standard" "Bad"

Demand in units (kilowatthours) 3,000 1,500 --

1. Which product generates the greatest contribution margin per machine hour for the Northwest Division?

Super? Standard? or Bad?

2.What is the optimal transfer pricing schedule for the Northwest Division to charge the Southwest Division for "Bad" energy?

0-3,125 units the transfer price =?

3,126-4,625 units the transfer price =?

4,626-5000 units the transfer price =?

3.The taxing authorities agree that the transfer price from the Northwest Division to the Southwest Division can be in a range of $3/u to $14/u. What is the optimal transfer price (from the perspective of Kebalo Electric as a whole) if the Southwest Division resides in a region that is regulated by a tax rate of 35%, whereas the tax rate for the Northwest Division is only 15%?(please answer as a number).

4.In one or two clear, concise, and complete sentences explain your answer to the question above.

5.What is the maximum total contribution margin of Kebalo Electric (hint: calculate the total revenue and subtract the total variable cost noting that the constraint is machine hours and there is an optimal production schedule of Super, Standard, and Bad power).

6.Suppose that the CEO of the firm forces the Northwest Division to transfer 4,000 kilowatt-hours of "Bad" power to the Southwest division at $4.00 per kilowatt-hour. What is the cost or benefit to the total profits of the firm if the Northwest division is forced to transfer 4,000 kilowatt-hours of "Bad" power to the Southwest division at $4.00 per kilowatt-hour? Ignore the taxes mentioned above in this analysis.

7. In one or two clear, concise, and complete sentences explain your answer to the question above.

Answer 1

1) calculation of contribution/ M.Hr

Super. Standard. Bad.

S.p/u. 6. 3. 5.

Less :

V.c/u. (2) (1). (3).  

Contibution/u. 4. 2. 2

M.hr/ u. 0.5. 0.25. 1

Contribution/m.hr

8. 8. 2

Super and standard are having the same and highest contibution per machine hour to the northwest division.

2.calculation of optimum transfer price :

Transfer price can be calculated based on the spare capacity available in the department.

If spare capacity available : transfer price = v.c/unit

If no spare capacity available in the department the optimal transfer price shall be

V.c/unit + contibution forgone on remaining products.

Maximum capacity at the department =. 5000m.hrs

Less: m.hrs req for super.( 3000*0.5hrs)= 1500m.hrs

Less: M.hrs req for standard(1500*0.25)= 375m.hrs

Balance no of m.hrs available for Bad. = 3125m.hrs

No of Bad units can be mfg = 3125m.hrs÷1= 3125 units

Transfer price at 3125 units = v.c /unit = 2/unit

T/f price for 3126 to 4625 units =v.c/unit+conti/m.hr

2$+8$*1= 10$/unit

T/f price for 4676 to 5000units =

2$+8$×1+8$×1= 18$/unit.

3) if the units are sold from Northwest division the comapny enjoys a lower tax rate as compared with the southwest division which is taxed at 35% but northwest division is taxed at 15% saving in tax at 20%,additionally variable cost incurred at bad is 1$/unit

Maximum t/f price to Bad = transfer price bad from division northwest to southwest = 5$÷0.8= 6.25$/unit

4) total contribution =

Total sales =

( 3000*6+1500*3+3125*5). = 38125$   

Less: total variable cost =

( 3000*2+1500*1+3125*3 ). = 16875$

Total contibution. = 21250$

Or

Super = 4$/unit*3000units = 12000$

Standard = 2$/unit * 1500units = 3000$

Bad = 2$/unit * 3125 = 6250$

Total contributio. = 21250$

Less : Fixed cost. = 15000$

Profit = 6250$

6) the total variable cost of the northwest division are 5$/unit the the CEO decided to transfer 4000kwhr to the southwest division at 4$/unit the company as a whole is losing 1$/unit i.e the company is losing 4000$.