I actually got this question right, but I just guessed. How do you determine the $30 difference? Can someone help me understand questions like this a little more easily?
Ajax Division of Carlyle Corporation produces electric motors, 20% of which are sold to Bradley Division of Carlyle and the remainder to outside customers. Carlyle treats its divisions as profit centers and allows division managers to choose their sources of sale and supply. Corporate policy requires that all interdivisional sales and purchases be recorded at variable cost as a transfer price. Ajax Division’s estimated sales and standard cost data for the year ending December 31, 2012, based on the full capacity of 100,000 units, are as follows:
Bradley Outsiders
Sales $900,000 $8,000,000
Variable costs (900,000) (3,600,000)
Fixed costs (300,000) (1,200,000)
Gross margin $(300,000) $3,200,000
Units sales 20,000 80,000
Carlyle is considering permitting the division managers to negotiate the transfer price for 2013. The managers agreed on a tentative transfer price of $75 per unit, to be reduced based on an equal sharing of the additional gross margin to Ajax resulting from sales to Bradley at $75 per unit instead of at variable cost. To evaluate this proposal, Carlyle would like to compare it with current policy based on 2012 results. Under the proposed action, the actual transfer price for 2012 sales of 20,000 motors would have been
$52.50
$55.00
$60.00
$67.50
This answer is correct. The additional gross margin generated by sales to Bradley equals the difference between the gross margin computed using the tentative transfer (selling) price of $75 and the old gross margin of ($300,000). If Ajax can record sales to Bradley at a transfer price of $75, its revenues will increase to $1,500,000 ($75 × 20,000), but its costs will remain the same at $1,200,000 ($900,000 + $300,000). This results in a positive gross margin of $300,000 ($1,500,000 – $1,200,000). The new gross margin is $600,000 [$300,000 – ($300,000)] greater than the original gross margin. The shortcut (incremental) approach is to multiply 20,000 units times the $30 increase ($75 – $45) in Ajax’s unit selling (transfer) price. This $600,000 is split equally between the Ajax and Bradley divisions, resulting in a $300,000 reduction in total sales for Ajax. The total transfer price (revenue) of $1,200,000 [($75 × 20,000) – $300,000] divided by the 20,000 units yields an actual unit transfer price of $60. The shortcut (incremental) approach is to subtract one-half of the $30 [new unit selling price ($75) less original unit selling price ($45)] increase in revenue per unit from the new selling price ($75) to arrive at $60 per unit [$75 – ($30/2) = $60].
Thank you!
REG - 79
FAR - ?
AUD - ?
BEC - ?
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