Reference no: EM131874191

Question 1 - Transfer prices and divisional profit

A chair manufacturer has two divisions: framing and upholstering. The framing costs are $100 per chair and the upholstering costs are $200 per chair. The company makes 5,000 chairs each year, which are sold for $500.

Required:

A. What is the profit of each division if the transfer price is $150?

B. What is the profit of each division if the transfer price is $200?

Question 2 - Performance measures for cost centers

A soft drink company has three bottling plants throughout the country. Bottling occurs at the regional level because of the high cost of transporting bottled soft drinks. The parent company supplies each plant with the syrup. The bottling plants combine the syrup with carbonated soda to make and bottle the soft drinks. The bottled soft drinks are then sent to regional grocery stores. The bottling plants are treated as costs centers. The managers of the bottling plants are evaluated based on minimizing the cost per soft drink bottled and delivered. Each bottling plant uses the same equipment, but some produce more bottles of soft drinks because of different demand. The costs and output for each bottling plant are:

A B C

Units Produced 10,000,000 20,000,000 30,000,000

Variable Costs $ 200,000 $ 450,000 $ 650,000

Fixed Costs $1,000,000 $1,000,000 $1,000,000

Required:

a. Estimate the average cost per unit for each plant.

b. Why would the manager of plant A be unhappy with using the average cost as the performance measure?

c. What is an alternative performance measure that would make the manager of plant A happier?

d. Under what circumstances might the average cost be a better performance measure?