In: Accounting
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.
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 |