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Homework

1.1 A company X with $ 280,000 fixed costs has the following data:

Product A Product B

Selling price/unit $ 5 $ 6

Variable cost/unit 3 5

If the company X currently sells a product which consists of a "bundle" of 3 units of Product A and one unit of Product B (i.e., one product sold consists of three units of A and one unit of B), break-even revenues for Product B will be equal to:

1.2 Crosswalk, Inc. collected the following information on the production costs per unit incurred to manufacture one of its products. The figures are based on a production level of 90,000 units:

Direct Materials

$ 11

Direct Labor

8

Variable Overhead

1

Fixed Overhead

2

Tot Cost/unit

$ 22

An outside company has offered to sell this product to Cross, Inc. for $24 per unit. If $ 130,000 of fixed costs can be eliminated, what production level is required for Cross, Inc. to be indifferent between making or buying the product?

1.3 Great Food Company recently acquired an olive oil processing company that has an annual capacity of 2,000,000 liters, and that processed and sold 800,000 liters last year at a price of $ 4 per liter. The Cooking division of Great Food needs 1,400,000 liters of oil per year. It had been purchasing oil from suppliers in the past at the market price of $ 4. Production costs of the oil company, now a division, are as follows:

Direct Materials per liter

$ 1.00

Direct Labor

0.50

Variable Processing Overhead

0.24

Fixed Overhead

(for volumes less than 1,000,000 liters)

800,000

Additional Fixed Overhead

(for volumes more than 1,000,000 liters)

600,000

Management is trying to decide what transfer price to use for sales from the newly acquired olive oil division to the Cooking division. Assuming that the olive division will continue to sell 800,000 liters a year to outsiders at the market price of $ 4, what is the range of feasible transfer prices that will induce the olive oil division to transfer 100,000 liters to the Cooking division?

1.4. The Assembly Division of European Car has offered to purchase 110,000 batteries from the Electrical Division for $ 104 per unit. At a normal volume of 250,000 batteries per year, production costs per battery are as follows:

Direct Materials

$40

Direct Labor

20

Variable Overhead

12

Fixed Overhead

40

Total

$ 112

The Electrical Division has been selling 250,000 batteries per year to outside buyers at $ 136 each. Capacity is 350,000 batteries per year. Per unit variable costs and total fixed costs will not change if the Electrical Division increases production from 250,000 to 350,000 batteries. Assuming that the Assembly Division has been buying batteries from outside sources for $ 136 each, from the company's perspective, will the internal sales be of any benefit? Will the Electrical Division manager accept the offer if he is paid a bonus based on total division profitability?