Question

Calculate the Division operating income for the Harvey Shoe Company which manufactures only one type of shoe and has two divisions, the Madison Division, and the Assembly Division. The Sole Division manufactures soles for the Assembly Division, which completes the shoe and sells it to retailers. The Madison Division "sells" soles to the Assembly Division. The market price for the Assembly Division to purchase a pair of soles is $80. (Ignore changes in inventory.) The fixed costs for the Madison Division are assumed to be the same over the range of 80,000-200,000 units. The fixed costs for the Assembly Division are assumed to be $28 per pair at 200,000 units.

   Madison’s costs per pair of soles are:
   Direct materials   $16
   Direct labor   $12
   Variable overhead   $8
   Division fixed costs   $4

   Assembly's costs per completed pair of shoes are:
   Direct materials   $24
   Direct labor   $8
   Variable overhead   $4
   Division fixed costs   $28

5) Assume the transfer price for a pair of soles is 180% of total costs of the Madison Division and 80,000 of soles are produced and transferred to the Assembly Division. The Madison Division's operating income is:

6) If the Assembly Division sells 200,000 pairs of shoes at a price of $240 a pair to customers, what is the operating income of both divisions together?

Answer 1

ANSWER

5).

Total Cost of Madison Division = $40

Transfer price = 180% of $40

= $72

6).

It is assumed that 80,000 pairs of sole are transferred from Madison Division at 180% of full cost and rest is purchased from outside supplier

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