Transfer Prices at Full Cost with Excess Capacity: Divisional Viewpoint

Karakomi Cameras Inc. has a Disposables Division that produces a camera that sells for $11.00 per unit in the open market. The cost of the product is $8.15 (variable manufacturing of $5.00, plus fixed manufacturing of $3.15). Total fixed manufacturing costs are $220,500 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 $8.15. 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.

Karakomi Cameras, Inc.Disposables Division Unit MarginsCurrent SalesPer UnitTotalSalesVariables costsContribution marginFixed costs:Net income

Compute net income includingthe offer to purchaseadditional cameras.

Do not use a negative sign with your answers.

New Sales

Proposed Sales

Per Unit

Total

Grand Total

SalesVariable costsContribution marginFixed costs:Net income

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