Question

Division L at Reiner Ltd. manufactures 17686 units of part #70, which it currently sells to outside customers. Selected data for part #70 are given below:

Unit selling price to outside customers	$90.81
Variable production cost per unit	57.70
Variable selling and administrative expense per unit	11.22
Total fixed production cost (based on a capacity of 19091 units per year)	$380000

Division K at Reiner Ltd. currently purchases 7621 units of part #70 from an outside supplier at a price of $85.91. Consideration is being given to buying internally rather than from the outside supplier. If an internal transfer takes place, it has been determined that variable S&A expense would be cut by one quarter for any sales made to Division K.

Assume the two divisions agree on a transfer price of $79.01. What is the incremental income to division L if a transfer takes place?

Select one:

a. $-37795

b. $67517

c. $-59172

d. $52585

Division A has the capacity for making 2820 motors per month and regularly sells 1929 motors each month on the intermediate market at a contribution margin of $63.46 per motor. A sister division, Division B, would like to obtain 1403 motors each month from Division A. In computing a transfer price per motor using the transfer pricing formula, the lost contribution margin per unit portion of the transfer price computation would be:

Select one:

a. $63.46

b. $34.74

c. $46.32

d. $23.16

Answer 1

Answer 1

Total Contribution Earlier (withhout interna transfer) = 17,686 * 21.89 = 387,146.50

If internal transfer to Division K is done:

Total Capacity of Division L = 19,091 units

Internal transfer to Division K = 7,621 units

Units Sold to Outside market = 11,470 units

Contribution on units sold to outside market = 11,470 * 21.89 = 251,078

Contribution on units transferred to Division K = 7,621 * 12.895 = 98,272.80

Total Contribution earned = 349,351

Net Decrease in Contribution = 349,351 - 387,146 = (37,795) Option A

Working:

Calculation of Contribution:

	Outside Sales	Internal Transfer
Selling Price	90.81	79.01
Variable Production Cost	57.70	57.70
Variable Selling & Admin Cost	11.22	8.415
Contribution	21.89	12.895

Answer 2:

Total Contribution earned by outside sales (With no internal transfer) = 1929 * 63.46 = 122,414

Total Capacity = 2820 units

Units transferred to division B = 1403

Units that can be sold to outside market = 2820 - 1403 = 1417

Contribution earned from outside sales = 1417 * 63.46 = 89,922

Remaining Contribution to be earned from internal transfer of 1403 units= 122,414 - 899,22 = 32,491

Lost contribution margin per unit portion of the transfer price = 32,491 / 1403 = $ 23.16 per unit - Option D