Reference no: EM133156486

Question 1 - Transfer Prices at Full Cost with Excess Capacity: Divisional Viewpoint - Karakomi Cameras Inc. has a Disposables Division that produces a camera that sells for $10 per unit in the open market. The cost of the product is $5.50 (variable manufacturing of $3.00, and fixed manufacturing of $2.50). Total fixed manufacturing costs are $100,000 at the normal annual production volume of 40,000 units. The Overseas Division has offered to buy 10,000 units at the full cost of $5.50. The Disposables Division has excess capacity, and the 10,000 units can be produced without interfering with the current outside sales of 40,000 units. The total fixed cost of the Disposables Division will not change.

Explain whether the Disposables Division should accept or reject the offer. Show calculations.

Compute net income at normal annual production volume.

Compute net income including the offer to purchase additional cameras.

Question 2 - Appropriate Transfer Prices: Opportunity Costs - Olam International Limited sources and processes agricultural products including edible nuts and spices. Assume the company recently acquired a peanut-processing company that has a normal annual capacity of 180,000 bushels and that sold 125,000 bushels last year at a price of $35 per bushel. The purpose of the acquisition is to furnish peanuts for a new peanut butter plant, which needs 75,000 bushels of peanuts per year. It has been purchasing peanuts from suppliers at the market price. Production costs per bushel of the peanut-processing company are as follows:

Direct materials $9

Direct labor 4

Variable overhead 2

Fixed overhead at normal capacity 10

Total $25

Management is trying to decide what transfer price to use for sales from the newly acquired Peanut Division to the Peanut Butter Division. The manager of the Peanut Division argues that $35, the market price, is appropriate. The manager of the Peanut Butter Division argues that the cost price of $25 (or perhaps even less) should be used since fixed overhead costs should be recomputed. Any output of the Peanut Division up to 180,000 bushels that is not sold to the Peanut Butter Division could be sold to regular customers at $35 per bushel.

(A) Compute the annual gross profit for the Peanut Division using a transfer price of $35.

(B) Compute the annual gross profit for the Peanut Division using a transfer price of $25.