Question

Gattor Golf Buggies Ltd. has two divisions. The Chassis Division prepares the sub-frame for the golf buggies at its factory. The Assembly Division prepares the sub-frame into the finished fully-functional golf buggy for sale to the customer. No inventories exist in either Division at the beginning of 2019. During the year 2019, the Chassis Division manufactured 600 sub-frames at a cost of $720,000. All the sub-frames were transferred to the Assembly Division, where additional operating costs of $500 per sub-frame were incurred. The 600 golf buggies were sold for $2,500,000.

Required:

Determine the operating income for each division if the transfer price from Chassis to Assembly is at cost of $1,200 a sub-frame. Show all workings.

Answer 1

Computation of Operating income of Chassis division.

Cost per unit = $720,000 / 600 = $1,200

Transfer price to Assembly division = $1,200

So, operating income = 600 units * ($1,200 - $1,200) = $0

Operating income of Chassis division = $0

Computation of Operating income of Assembly division.

Input Cost of sub frames received from Chassis division = $1,200

Add: Operating costs = $500

Total cost per unit = $1,700

Total cost ($1,700 per unit * 600) = $1,020,000

Total sale value = $2,500,000

Operating Income ($2,500,000 - $1,020,000) = $1,480,000

Operating Income of Assembly division = $1,480,000