Question

Tops Corporation is organized into two divisions, Manufacturing and Marketing. Both divisions are considered to be profit centers and the two division managers are evaluated in large part on divisional income. The company makes a single product. It is fabricated in Manufacturing and then packaged and sold in Marketing. There is no intermediate market for the product.

The monthly income statements, in thousands of dollars, for the two divisions follow. Production and sales amounted to 10,000 units.

	Manufacturing				Marketing
Revenues		3,000				5,000
Variable costs	$	2,400			$	3,700
Contribution margin	$	600			$	1,300
Fixed costs	$	500			$	800
Divisional profit	$	100			$	500

The company has just received an offer to buy 1,000 units of the product this month at a price of $400 per unit. The Marketing Division manager suggests that for the special order only, the transfer price be set at 50 percent of the sales price, or $200 per unit. Instead, assume the transfer price is unchanged from the current transfer price.

Required:

a. Does Tops Corporation want to accept this order? Accept/Reject

b. Will the Marketing Division manager be willing to accept this order? Accept/Reject

c. Will the Manufacturing Division manager be willing to accept this order? Accept/Reject

Answer 1

The costs relevant in decision are variable costs only. Fixed costs are constant and will not be affected by new order.

unit is transferred from manufacturing to marketing. The revenue of manufacturing department is result of transfer to marketing department. entire revenue of manufacturing department is from marketing department.

current Transfer price is revenue of manufacturing department.

$3,000,000/ 10000units

=$300 per unit

a. assume the transfer price is unchanged from the current transfer price.

As a company as whole, Tops corporation will accept order if contribution margin increases by accepting order.

contribution margin = sales price - variable cost of manufacturing department - variable cost of marketing department

$400 - [$2400*1000/10000units] - $70

=$400 - $240 - $70**

= $90

Yes, company would accept the order.As increases total profit of tops corporation by [$90*1000units] $90000

$370variable cost includes $300 transfer price which will not be taken into consideration as for company as a whole it is just internal transfer and not actual cost.Actual cost is $240 variable cost of manufacturing department.

$370-$300 =$70 variable cost of marketing department.

b.If transfer price is $300

profit of marketing department will increase

Incremental revenue	$400000	$400*1000
Less : variable cost	$370000	[$70+$300transfer price]*1000units
Incremental profit	$30000	$400000-$370000

yes marketing department would accept the order as it increase its profit by 30000$

d.

If transfer price is $300

manufacturing division

Revenue	$300000	$200*1000
Less variable costs	$240000	$240*10000
Loss	$60000	300000-240000

yes marketing department would accept the order as it increase its profit by 60000$