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.
Do not round "Per Unit" 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 | |||
Solution 1:
| Karakomi Cameras Inc. | ||
| Disposables Divisions unit margins | ||
| Particulars | Current Sales | |
| Per unit | Total | |
| Sales | $15.00 | $1,050,000.00 |
| Variable costs | $5.00 | $350,000.00 |
| Contribution margin | $10.00 | $700,000.00 |
| Fixed cost | $567,000.00 | |
| Net Income | $133,000.00 | |
| Karakomi Cameras Inc. | |||
| Particulars | New Sales | Grand Total | |
| 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 | $0.00 | $567,000.00 | |
| Net Income | $162,000.00 | $295,000.00 | |
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