Question

5. Johnson Corp. has two divisions, Division A and Division B. Division B has asked Division A to supply it with 5,000 units of part WD26 this year to use in one of its products. Division A has the capacity to produce 25,000 units of part WD26 per year. Division A expects to sell 21,000 units of part WD26 to outside customers this year at a price of $20.00 per unit. To fill the order from Division B, Division A would have to cut back its sales to outside customers. Division A’s variable manufacturing cost (direct labor + direct material + variable overhead) for part WD26 is $12.00 per unit. The variable selling cost when selling to outside customers is $2.00 per unit. This variable selling cost would not have to be incurred on sales of the parts to Division B. 5.1. Calculate Division A’s minimum acceptable transfer price. 5.2. Baker Inc. has approached Division B and has offered to sell 5,000 units of the part for $18 per unit. . Division B can either purchase the part from Baker Inc. or transfer it from Division A. How much does the overall profit of Johnson Inc. increase or decrease, if Division B accepts Baker’s offer and declines to transfer any units from Division A. Can you explain for Division A why is the math for Accept on 5.3 (13.20-12)*5,000+ 6*20,000

Answer 1

	4000 Units	1000 Units	Total
VariableManufacturing Cost	48,000	12,000	60,000
Contribution Lost	-	8,000	8,000
Savings in Selling Cost		(2,000)	(2,000)
	48,000	18,000	66,000
Total Number of Units			5000
Minimum acceptable transfer price			13.20

	Division A
Capacity	25,000
Expected Sale Unit	21,000
Idle Capacity	4,000
Selling Price	20
VariableManufacturing Cost	12
Contribution Lost	8

Since to fill the order from Division B, Division A would have to cut back its sales to outside customers by 1000 units so we will charge the Contribution loss from the Division B.

Part2:

Baker Inc.
Selling Price	90,000
VariableManufacturing Cost	60,000
Contribution Lost(1000*8)	8,000
Net Increase(Decrease) in Profit	22,000

In the Par 2 , I have assumed no savings in the Selling Cost as not mentioned about this in the Question.

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