Beta Shoe Ltd. manufactures only one type of shoe and has two divisions, the Sole Division, and the Assembly Division. The Sole Division manufactures soles for the Assembly Division, which completes the shoe and sells it to retailers. The market price for the Assembly Division to purchase a pair of soles from an outside supplier is $20. The per unit fixed costs are based on a normal production level of 60,000 pairs of shoes per year.

Sole's costs per pair of soles are:

Direct materials	$4
Direct labour	$3
Variable overhead	$2
Division fixed costs	$1

Assembly's costs per completed pair of shoes, not including soles, are:

Additional Direct materials	$6
Direct labour	$2
Variable overhead	$1
Division fixed costs	$2

Required: Note – each question is independent

1. What would be the transfer price per pair of soles from the Sole Division to the Assembly Division if the method used to place a value on each pair of soles is 180% of variable costs? (3 marks)

2. What would be the transfer price per pair of soles from the Sole Division to the Assembly Division if the transfer price per pair of soles is 125% of full costs? (3 marks

3. Assume the transfer price for a pair of soles is $20 and 50,000 pairs of soles are produced and transferred to the Assembly Division. No other sales of soles were made during the year. What is the Sole Division's operating income for the year? (3 marks)

4. Next year the Assembly Division expects to sell 70,000 pairs of shoes at a price of $60 a pair. Assuming they acquire all the soles from the Soles Division, what will be the company's budgeted total operating income? (4 marks)

5. The Assembly Division is considering purchasing the soles from an outside supplier, Soles R Us, who have offered to sell at a very competitive price. Discuss two factors, other than financial ones, that should be considered before a final decision is made on whether to outsource the purchase of soles. (2 marks)

Answer rating: 100% (QA)

1 180 of variable costs fixed costs are constant at all levels of sales whereas variable costs chang... View the full answer