Question

In: Accounting

Bangles Inc. manufactures and sells engines and lawn mowers. There are two divisions in Bangles Inc.,...

Bangles Inc. manufactures and sells engines and lawn mowers. There are two divisions in Bangles Inc., the Dalton and the Green divisions. Small engines are manufactured in the Green Division. These engines are purchased by the Dalton Division but are also sold in the external market. The capacity of the Green Division is 30,000 engines. Dalton division needs 10,000 of the small engines annually. If Green did not sell to Dalton, Green could sell its entire capacity of 30,000 engines in the external market. The following information is available:

                       

                        External market price for one engine:                       $85

                        Variable product cost per engine $48

                        Variable production cost per engine $ 6

                        Fixed cost per engine (based on division capacity) $12

Dalton can purchase 10,000 engines that it needs from an outside supplier at $80 per engine or it can purchase the Green division (internal transfer).

1. If Dalton wants to purchase 10,000 engines from Green Division, the minimum acceptable transfer price from the perspective of the selling division (Green) would be:

2. If half of the variable marketing cost could be avoided by selling to Dalton Division, the minimum acceptable transfer price from the perspective of the selling division would be:

3. If Green division expanded its plant capacity to 50,000 engines, and the maximum engines that it could sell in the external market remained at 30,000 engines, the minimum acceptable transfer price from the perspective of the selling division would be (assuming half of the variable marketing costs continue to be avoidable on internal transfers):

4. Assume the situation described in C. Managers of Green and Dalton have agreed to a negotiated transfer price of $67. Further, assume that Dalton had previously been purchasing the engines from an outside supplier at $80 per engine. What is the impact on TOTAL profitability for Bangles Inc if Dalton division buys the 10,000 engines from Green at the agreed transfer price.

Solutions

Expert Solution

Ans
30000 10000 30000
1) Green Division Capacity 10000 Capacity 10000
Sales 85
Variable Cost 48 480000 1440000
Variable production cost 6 60000 180000
Contribution per unit 31
Total 85 540000 1620000
54
Fixed cost will be ignore as it will incurred regardless of production
Variable Cost 54
Opportunity Cost 31
Minimum transfer price 85
As Green division have external market the it's minimum Transfer price $ 85 only
30000 10000 30000
2 Green Division Capacity 10000 Capacity 10000
Sales 85
Variable Cost 48 480000 1440000
*Variable production cost 6 60000 180000
Contribution per unit 31
Total 85 540000 1620000
54
* Assume that variable production cost is Variable Marketing cost as nothing is being mention here about
Marketing cost
Variable Cost 48
*Variable production cost 3
Opportunity Cost 31
Minimum transfer price 82
As half of production cost can be avoided by selling internally then minimum price would be $82 per engine
3 Variable Cost 48
*Variable production cost 3
Opportunity Cost
Minimum transfer price 51
As capacity is increase but no external market then minimum transfer price should be $51
& even marketing cost is also half due to internal transfer
30000 10000
4 Grenn Division Dalton Division Internal Buy External Buy Diff in profit
Green Division 30000 External Sales Internal Rate 10000 Internal Sales Total Internal External @ 80 Over all Profit Over all Profit
Variable Cost 48 1440000 48 480000 1920000 670000 800000
*Variable production cost 6 180000 3 30000 210000 0 0
Total Variable cost 54 1620000 51 510000 2130000 670000 800000
Sales price 85 67 0 0
sales Value in $ 2550000 670000 3220000 0 0
Profit 930000 160000 1090000 -670000 -800000 1510000 130000 1380000
Fixed cost is being ignore in above calculation
It is clear from above working that if bangles Inc buying internally then it can gain profit up to $ 1510000 without Fixed cost, & if it is buying externally it gain
up to $ 130000
Capacity 50000
Internal Buy External Buy Diff in profit
Profit 1510000 130000 1380000
Fixed cost 600000 600000 0
Net profit 910000 -470000 1380000
* condition while increasing capacity fixed cost also increase that extend

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