Reference no: EM132515856
Jasmine Corp. operates two divisions. The following data relate to its Motor Division:
Division assets
Cash $ 350,000
Inventories 462,000
Property, plant and equipment, net 3,920,000
Total division assets $ 4,732,000
Point 1: The Motor Division manufactures a heavy-duty motor that can be used for midsize tools. The variable costs of manufacturing are $175 per unit and fixed manufacturing costs per unit are $21 at a level of 70,000 units of production. Of the 70,000 motors produced annually, 14,000 are transferred to the company's Chainsaw Division. The two division managers cannot agree on the price at which these engines should be sold. The Chainsaw Division's manager has offered to pay $198, which is the price at which the motors can be purchased from an outside supplier. The Motor Division's manager feels that the Chainsaw Division should pay $210, which is the current sales price to external customers.
Point 2: The company's controller has performed an analysis of the Motor Division and has determined that if the division discontinues transfers to the Chainsaw Division, it can eliminate fixed costs of $35,000. The Motor Division can allocate its freed up resources to produce a new product that is estimated to bring in an annual contribution margin of $44,800.
Question 1: Assuming you are the manager of the Motor Division, should the transfer of the motors to the Chainsaw Division at $198 be made?
a) No, the loss over discontinuing transfers is $7,000.
b) No, the loss over discontinuing transfers is $51,800.
c) Yes, the profit over discontinuing transfers is $82,200.
d) Yes, the profit over discontinuing transfers is $242,200.
Question 2: Assume that management decides the motors will be sold to the Chainsaw Division using a transfer price of $198. If the Motor Division sets its prices based on total production costs, at what price should the 56,000 motors be sold to external customers to achieve a 12% return on assets for the Motor Division?
a) $164.51
b) $179.39
c) $203.90
d) $205.64