1) Giga-Stuff, Inc. has a number of divisions. One division, Sophistosand, makes

Question

1)

Giga-Stuff, Inc. has a number of divisions. One division, Sophistosand, makes a component, component X, that is used in the manufacture of DVD players. Another division, Videostuff, makes DVD players that use component X and needs 60,000 units of component X per year. Sophistosand incurs the following costs for one unit of component X:

Sophistosand has capacity to make 400,000 units of component X per year, but due to a soft market, only plans to produce and sell 320,000 units next year. Videostuff currently buys component X from an outside supplier for $2.50 each (the same price that Sophistosand receives). Refer to Figure 12-4. Assume that Sophistosand and Videostuff have agreed on a transfer price of $2.20. What is the total benefit for Sophistosand?

Direct materials $0.30 Direct labor 0.15 Variable overhead 0.70 Fixed overhead 1.00 Total $2.15

Explanation / Answer

Hi,

Please find the answers as follows:

Part A:

=60000*(2.2-1.15) = 63000

Part B

= 60000*(2.5 -2.2) = 18000

Thanks.

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