A hammer manufacturer, Asgard Industries, has 3 divisions: Loki, which processes heavy steel; Odin, which molds extra heavy-duty hammer heads; and Thor, which manufactures fasteners and attaches hammer heads to handles. The manager of each division receives annual bonuses based on their individual division's profit. They each have full decision-making authority on whether to sell to internal or external customers, set prices, and negotiate transfer prices if they decide to purchase or sell from/to an internal division. Currently, the manager of the Odin division has limited capacity and has two orders she must choose between (see below). The company's fixed overhead will not be impacted by the decision.

order 1: Thor division would like to purchase 2,000 hammer heads for a price of $1,600 each. To manufacture each hammer head, Odin would need to purchase a block of steel from Loki division at a transfer price of $420 each. Odin division's variable cost to further process the steel into a hammer head is $470. Five of Odin's machine hours would be required for each; Odin's fixed manufacturing overhead rate is $23 per machine hour.

Order 2: Odin division could sell 2,500 hammer heads to Bor Incorporated at a price of $1,200 each. Odin would purchase a steel block from Loki for $200 to make each lightweight hammer head. The variable cost to Loki for each block would be $100 and each would require two of Loki division's machine hours. Odin would incur an additional variable cost of $465 per hammer head and use four machine hours to process.

Requirement 1: What is the difference between the two options for Odin division? Which should the manager of the Odin division choose to maximize her division's profit (and her annual bonus)?

Requirement 2: What is the difference between the two options for Asgard Industries as a whole? Which of the two alternatives should be selected to benefit the company?
The variable cost incurred by Loki for each block of steel is $200. It uses 2.5 machine-hours for each, and has a fixed manufacturing overhead rate of $38 per machine hour.
If this order is not chosen, the Thor division will have to buy hammer heads from Hela Corporation at a price of $1,600 each. Hela Corporation would be purchasing the steel from Asgard's Loki division for $390 per block. While the machine hours used by Loki would still be 2.5, the division's variable cost would only be $175 per unit because of a slight difference in the specifications.

Answer rating: 100% (QA)

The difference between the two options is that option 1 would result in a higher profit for the Odin division The manager should choose option 1 to ma... View the full answer