Question

# Transfer Prices at Full Cost with Excess Capacity: Divisional Viewpoint Karakomi Cameras Inc. has a Disposables...

Transfer Prices at Full Cost with Excess Capacity: Divisional Viewpoint
Karakomi Cameras Inc. has a Disposables Division that produces a camera that sells for \$15.00 per unit in the open market. The cost of the product is \$13.10 (variable manufacturing of \$5.00, plus fixed manufacturing of \$8.10). Total fixed manufacturing costs are \$567,000 at the normal annual production volume of 70,000 units. The Overseas Division has offered to buy 20,000 units at the full cost of \$13.10. The Disposables Division has excess capacity, and the 20,000 units can be produced without interfering with the current outside sales of 70,000 units. The total fixed cost of the Disposables Division will not change.

Explain whether the Disposables Division should accept or reject the offer. Show calculations.

Compute net income at normal annual production volume.

Karakomi Cameras, Inc.
Disposables Division Unit Margins
Current Sales
Per Unit Total

Compute net income including the offer to purchase additional cameras.

New Sales

Proposed Sales

Per Unit

Total

Grand Total

Solution 1:

 Karakomi Cameras Inc. Disposables Divisions unit margins Particulars Current Sales at 70,000 units Per unit Total Sales \$15.00 \$1,050,000 Variable costs \$5.00 \$350,000 Contribution margin \$10.00 \$700,000 Fixed cost \$8.10 \$567,000 Net Income \$1.90 \$133,000
 Karakomi Cameras Inc. Particulars New Sales of 20,000 units Grand Total for 70,000+20,000=90,000 units Per unit Total Sales \$13.10 \$262,000.00 \$1,312,000.00 Variable costs \$5.00 \$100,000.00 \$450,000.00 Contribution margin \$8.10 \$162,000.00 \$862,000.00 Fixed cost \$567,000/90,000 \$6.3 \$567,000.00 Net Income \$295,000/90000 \$3.28 \$295,000.00