The Axle Division of Becker Company produces axles for off-road sport vehicles.
ID: 2419628 • Letter: T
Question
The Axle Division of Becker Company produces axles for off-road sport vehicles. One-third of Axle's 39,000 unit output is sold to an internal division of Becker; the remainder is sold to outside customers. Axles' estimated operating profit for the year is:
The internal division has an opportunity to purchase 13,000 axles of the same quality from an outside supplier on a continuing basis. The purchase price would be $17.00. If the Axle Division is now operating at full capacity and can sell all its units to outside customers at the present selling price, what is the minimum selling price that Axle should accept from the internal division?
Internal Outside Sales $ 250,000 $ 500,000 Variable costs 143,000 286,000 Fixed costs 31,000 61,000 Operating profits $ 76,000 $ 153,000 Unit sales 13,000 26,000Explanation / Answer
Since the Axle division has no spare capacity therefore it should sell its product to internal division at cost plus contribution.
Variablr cost per unit = 286000/26000 = 11
Contribution per unit = (500000 - 286000)/26000
= 8.23
Thus minimum selling price will be = 11+8.23 = 19.23 per unit
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