Question

The Van Division of MotoCar Corporation has offered to purchase 180,000 wheels from the Wheel Division...

The Van Division of MotoCar Corporation has offered to purchase 180,000 wheels from the Wheel Division for $76 per wheel. At a normal volume of 500,000 wheels per year, production costs per wheel for the Wheel Division are as follows:

Direct Matierals 26

Direct Labor 20

Variable Overhead 12

Fixed overhead 30

Total 88

The Wheel Division has been selling te 500,000 wheels per year to oustside buyers at $106 each. Capacity is 700,000 wheels per year. The van division has been buying wheels from outsid suppliers at $100 per wheel.

A. Should the wheel dividsion manager accept the offer? Show computations
Variable Cost
Wheel Sold
From the standpoint of the company, will the internal sale be beneficial?
A. Should the wheel dividsion manager accept the offer? Show computations
Variable Cost
Wheel Sold
From the standpoint of the company, will the internal sale be beneficial?
Business   Accounting   
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Answer #1

Answer:- A)- Yes, the Wheel division manager should accept the offer and transfer the wheels to van division on the price of $76 per wheel.

Wheel division total capacity =700000 wheels

Outside sale by Wheel division = 500000 wheels

Spare capacity = 200000 wheels

Demand from Van division = 180000 wheels

Extra contribution to wheel division due to transfer = Transfer price per wheel- Variable cost per wheel

= $76 per wheel- ($26+$20+$12) per wheel

= $18 per wheel

From the standpoint of the company, the internal sale will be beneficial for both divisions, because Van division has been buying wheels from outside suppliers at $100 per wheel, but from wheel division at $76 per wheel.

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