Answered: Answer is complete but not entirely…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Weller Industries has six divisions. Its Electrical Division (which is operating at capacity) produces a variety of electrical items, including an X52 electrical fitting that it sells to regular customers for $10.40 each. The fitting has a variable manufacturing cost of $5.35. The company’s Brake Division wants the Electrical Division to provide a large quantity of X52 fittings for $8.40 each. The Brake Division, which is operating at 50% of capacity, will put the fitting into a brake unit it produces and sells to an airplane manufacturer. The cost of the brake unit being built by the Brake Division follows: Purchased parts (from outside vendors) $ 25.00 Electrical fitting X52 8.40 Other variable costs 15.09 Fixed overhead and administration 9.10 Total cost per brake unit $ 57.59 Although the Brake Division’s proposed price of $8.40 for the X52 fitting is well below the Electrical Division’s regular price of $10.40, the manager of the Brake Division believes the price concession is necessary for his division to win the contract for the airplane brake units. He has heard “through the grapevine” the airplane manufacturer will reject his bid if it is more than $59 per brake unit. Thus, if the Brake Division is forced to pay the regular $10.40 price for the X52 fitting, it will either not get the contract or suffer a substantial loss. The manager of the Brake Division believes the price concession benefits his division and the company as a whole. Weller Industries uses return on investment (ROI) to measure divisional performance. Required: 1. Assume that you are the manager of the Electrical Division. * What is the lowest acceptable transfer price for the Electrical Division? * Would you supply the X52 fitting to the Brake Division for $8.40 each as requested? 2. Assuming the airplane brakes can be sold for $59, what is the financial advantage (disadvantage) for the company (on a per-unit basis) if the Electrical Division supplies fittings to the Brake Division? 3. In principle, within what range would the transfer price lie? Note: For all requirements, enter your "Financial Disadvantage" amounts as a negative value and round your final answers to 2 decimal places.

Answer is complete but not entirely correct.
1a. Lowest acceptable transfer price
1b. Would you supply the X52 fitting to the Brake Division for $8.40 each as requested?
2. Financial advantage (disadvantage) on a per unit basis
3. Range of transfer price
$
10.40 to
$
No
$
$
10.40
8.60 x
19.00 X

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