XYZ Co has two divisions, X and Y. Division X makes a component for washing machines which it can only sell to Division Y. It has no other outlet for sales. Current information relating to Division X is as follows: Marginal cost per unit $1000 Transfer price of the component $1650 Total production and sales of the component each year 2,200 units Specific fixed costs of Division X per year $100,000 ABC has offered to sell the component to Division Y for $1400 per unit. If Division Y accepts this offer, Division X will be closed. 1. What is the minimum and maximum transfer price? 2. What will happen to XYZ’s profits if Division Y accepts the supplier’s offer and Division X is closed? 3. Assuming if Division Y buys from the outside supplier the facilities currently used to produce the component can be used to produce another product which will result in a contribution margin of $75,000. Division X cannot manufacture the component and produce the other product at the same time. What is the minimum transfer price?
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
XYZ Co has two divisions, X and Y. Division X makes a component for washing machines which it can only sell to Division Y. It has no other outlet for sales.
Current information relating to Division X is as follows:
Marginal cost per unit $1000
Transfer price of the component $1650
Total production and sales of the component each year 2,200 units
Specific fixed costs of Division X per year $100,000
ABC has offered to sell the component to Division Y for $1400 per unit. If Division Y accepts this offer, Division X will be closed.
1. What is the minimum and maximum transfer price?
2. What will happen to XYZ’s profits if Division Y accepts the supplier’s offer and Division X is closed?
3. Assuming if Division Y buys from the outside supplier the facilities currently used to produce the component can be used to produce another product which will result in a contribution margin of $75,000. Division X cannot manufacture the component and produce the other product at the same time. What is the minimum transfer price?
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