Reference no: EM133013759

Question - Controls Division of Electric Motors Corp. manufactures a starter with the following standard costs: Direct material $5 Direct labour 30 Overhead 15 Total unit cost $50 The standard direct labour rate is $15 per hour, and overhead is assigned at 50% of the direct labour rate. Normal direct labour hours are 20,000, and the overhead rate is $2.50 variable and $5 fixed per direct labour hour. The starters sell for $75 and Controls Division is currently operating at 16,000 direct labour hours for the year. All transfers in Electric Motor Corp. are made at market price. If mutually agreed upon, the divisional managers are permitted to negotiate a transfer price. Motor Division currently purchases 2,000 starters annually from Controls Division at the market price. The divisional manager of Motor Division indicates he can purchase the starters from a foreign supplier for $65. Because he can use external suppliers, he has indicated that he wants to negotiate a new transfer price with Controls Division. The Controls Division manager states that she believes that the foreign supplier is attempting to "buy in" by selling the starters at an excessively low price.

Required -

From the point of view of Controls Division, how much will its net income change if Motor Division purchases the starters are purchased from the foreign supplier?

What is the minimum price at which Controls Division would transfer the starters to Motor Division?

What is the change in the net income of Controls Division if the transfers are made to Motor Division at $65 a unit?