Reference no: EM132723988

Division A manufactures plastic tubes. The tubes can be sold to Division B of the same company or to outside customers. Last year, the following activity was recorded in Division A: Selling price per tube, P175; Production and other costs per tube, P120, 75% of which is variable; Number of tubes: Normal capacity and actual production during the year, 20,000; Sold to outside customers, 16,000; Sold to division B, 4,000, Sales to Division B were at the same price as sales to outside customers. B incurred P300 in additional cost per unit and then sold the final product for P600 each.

Required:

Question 1. Prepare the income statements for last year for Division A, Division B, and company as a whole.

Question 2. Assume that Division A's manufacturing capacity is 20,000 tubes per year. Next year, Division B wants to purchase 5,000 tubes from Division A, rather than only 4,000 in the last year. (Tubes of this kind are not available from outside sources.) From the standpoint of the company as a whole, should Division A sell the 1,000 additional tubes to Division B, or should it continue to sell them to outside customers? Show the effect on the income statements if A sold the 1,000 units to B versus is A did not sell the 1,000 units to B.

Question 3. Assume that Division A is able to sell all 20,000 tubes to outside customers at P175 per tube. Next year, Division B's production requirement is 6,000 units. Another company offered to supply a similar product to Division B at P110 per tube. How much is the minimum acceptable transfer price for Division A?

Question 4. Assume that Division A is able to sell only 10,000 tubes to outside customers at P175 per tube. Next year, Division B's production requirement is 6,000 units. Another company offered to supply a similar product to Division B at P110 per tube. How much is the minimum acceptable transfer price for Division A?

Question 5. Assume that Division A is able to sell only 17,000 tubes to outside customers at P175 per tube. Next year, Division B's production requirement is 6,000 units. Another company offered to supply a similar product to Division B at P110 per tube. How much is the minimum acceptable transfer price for Division A and the maximum acceptable transfer price for Division B?