P 511: Cogen

Cogens Turbine Division manufactures gas-powered turbines for generating electric power and hot water for heating systems. Turbines variable cost per unit is $150,000 and its fixed cost is $1.8 million per month. It has excess capacity. Cogens Generator Division buys gas turbines from Cogens Turbine Division and incorporates them into electric steam-generating units. Both divisional managers are evaluated and rewarded as profit centers.

The Generator Division has variable cost of $200,000 per completed unit, excluding the cost of the turbine, and fixed cost of $1.4 million per month.

QUESTION: How where the Variable Cost, Transfer Price, Total Cost and Generators Profits calculated in the answer below for the following question?

A. If the transfer price is set at variable cost ($150,000), the Generator Division will buy seven turbine (see table) as this level maximizes the divisions profits.

			Generator's	Var. Cost
			Variable	Transfer	Total	Generator's
Quantity	Price (000)	Revenue	Cost	Price	Cost	Profits
1	$1,000	$1,000	$200	$150	$1750	($750)
2	950	$1,900	400	300	2100	(200)
3	900	$2,700	600	450	2450	250
4	850	$3,400	800	600	2800	600
5	800	$4,000	1000	750	3150	850
6	750	$4,500	1200	900	3500	1,000
7	700	$4,900	1400	1050	3850	1,050
8	650	$5,200	1600	1200	4200	1,000