Question4

Johnson Electric Motors is a mul-divisional. decentralized company that manufactures various kinds of motors and engines. The top management team at Johnson makes all decisions regarding purchases of capital assets within the company. The Starter Division of Johnson Electric Motors manufactures a starter motorwith the following standard costs: Direct material $5 Direct labour $30 Overhead $15 Total unit cost $50 The direct labour standard is $10 per hour. The overhead rate is 40% variable and 60% xed per direct labour hour. The Starter Division has a capacity of 20,000 direct labour hours. The starter motors sell for $75. and the Starter Division is currentlv operating at a level of 16.000 direct labour hours for the vear. All transfers within Johnson are made at market price. lf mutually agreed upon. the divisional managers are permitted to negotiate a transfer price. The Motor Division. which is the only division within Johnson that purchases starter motors from the Starter Division. currently purchases 1,000 starter motors from the Starter Division at the market price. The divisional manager of the Motor Division indicates that they can purchase the starters from a foreign supplier for $65 (translated to Canadian S at the current exchange rate). Because they are free to select a supplier, they have indicated that they would like to negotiate a new transfer price with the Starter Division. The manager of the Starter Division. who has a reputation of being honest. believes that the foreign supplier is attempting to break into the starter motor market by selling the starters at an excessively low price. Use this information for the following 5 questions