Question

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.

Do not use a negative sign with your answers.

Karakomi Cameras, Inc.
Disposables Division Unit Margins
	Current Sales
	Per Unit	Total
Sales	Answer	Answer
Variables costs	Answer	Answer
Contribution margin	Answer	Answer
Fixed costs:	Answer	Answer
Net income	Answer	Answer

Compute net income including the offer to purchase additional cameras.

Do not use a negative sign with your answers.

			New Sales
Proposed Sales			Per Unit	Total	Grand Total
Sales			Answer	Answer	Answer
Variable costs			Answer	Answer	Answer
Contribution margin			Answer	Answer	Answer
Fixed costs:			Answer		Answer
Net income			Answer		Answer

Answer 1

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