Transfer Prices at Full Cost with Excess Capacity: Divisional Viewpoint Karakomi

Question

Transfer Prices at Full Cost with Excess Capacity: Divisional Viewpoint Karakomi Cameras Inc. has a Disposables Division that produces a camera that sells for $14.00 per unit in the open market. The cost of the product is $11.30 (variable manufacturing of $5.00, plus fixed manufacturing of $6.30). Total fixed manufacturing costs are $441,000 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 $11.30. 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. Do not round "Per Unit" answers.

Karakomi Cameras, Inc

Disposables Division Unit Margins

Current Sales

Net income

Compute net income including the offer to purchase additional cameras.

Do not use a negative sign with your answers.

New Sales

Net income

Explanation / Answer

Karakomi Cameras, Inc Disposables Division Unit Margins Current Sales Per Unit Total Sales              14.00              980,000.00 Variable costs                5.00              350,000.00 Contribution Margin                9.00              630,000.00 Fixed costs                6.30              441,000.00 Net income                2.70              189,000.00 Computation of net income including the offer to purchase additional cameras. New Sales Proposed Sales (Additional units Only)Per Unit Total Grand total Sales              11.30              226,000.00           1,206,000.00 Variable costs                5.00              100,000.00              450,000.00 Contribution Margin                6.30              126,000.00              756,000.00 Fixed costs (absorved by all (70000+20000)=90000                4.90                98,000.00 441000.00 Net income                1.40                28,000.00 315,000.00

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