Goal-congruence, taxes, different market conditions. TECA Halifax makes kids bicycles. Theframes division makes and paints the frames
Fantastic news! We've Found the answer you've been seeking!
Question:
The assembly division currently acquires all its frames from the division of the frame. The assembly divisionmanager could purchase similar frames in the market for $480.
The frames division is currently operating at 80% of its capacity of 4,000 frames (units) and has the following particulars:
Direct materials ($150 per unit × 3,200 units) $480,000
Direct manufacturing labour ($60 per unit × 3,200 units) 192,000
Variable manufacturing overhead costs ($30 per unit × 3,200 units) 96,000
Fixed manufacturing overhead costs 624,000
All the frames division’s 3,200 units are currently transferred to the assembly division. No frames aresold in the outside market.
The frames division has just received an order for 2,000 units at $450 per frame that would utilize halfthe capacity of the plant. The order has to be either taken in full or rejected totally. The order is for a slightlydifferent frame than what the division of the frame currently makes but takes the same amount of manufacturingtime. To produce the new frame would require direct materials per unit of $100, direct manufacturing labor per unit of $48, and variable manufacturing overhead costs per unit of $30.
Instructions
Form groups of two or three students to complete the following requirements.
Required
1. From the viewpoint of TECA Halifax as a whole, should the division of the frame accept the order for the the2,000 units?
2. What range of transfer prices result in achieving the actions determined to be optimal in requirement
1, if division managers act in a decentralized manner?
3. The manager of the assembly division has proposed a transfer price for the frames equal to the full cost of the frames including an allocation of overhead costs. The frames division allocates overhead costs to engines on the basis of the total capacity of the plant used to manufacture the frames.
a. Calculate the transfer price for the frames transferred to the assembly division under this arrangement.
b. Do you think that the transfer price calculated in requirement 3a will result in achieving the actions determined to be optimal in requirement 1 if division managers act in a decentralized manner?
c. Comment in general on one advantage and one disadvantage of using full costs of the producing division as the basis for setting transfer prices.
Related Book For
Cost Accounting A Managerial Emphasis
ISBN: 978-0133392883
6th Canadian edition
Authors: Horngren, Srikant Datar, George Foster, Madhav Rajan, Christ
Posted Date: