Word Wizard is a publishing company with a number of different book lines. Each

Question

Word Wizard is a publishing company with a number of different book lines. Each line has contracts with a number of dfferent authors. The company The book lines and the printing operation each operate as a separate proft center. The printing operation earms revenue Word Wizard, as well as authors under contract with other Books, one of the Word Wizard's book l CALCULATOR STANDARD VIN" PRINTER VERSION ·BACK also owns a printing operation called Quick Press revenue by printing books by authors under contract with the book lines owned by companies. The printing operation bils out at $0.01 per page, and a typical book requires 500 pages of print. A manager from Business s variableco r pae is s0.004ngoeration offering to pay $o.007 per page for 1,500 copies of a 500-page book. The book ine pays outside Determine whether the printing should be done internally or externalily, and the appropriate transfer price, under each of the following situations Assume that the printing operation is booked solid for the Transfer price to 4 decimal places, e.g.0.1892) next 2 years, and it would have to cancel an obligation with an outside customer in order to meet the needs of the internal division. f Round Printing should be done Tieney Minimum transfer price Assume that the printing operation has available capacity,(Round Transfer price to 4 decimal places, o.g0192 Printing should be done Minimum transfer price Calculate the change in contribution margin to each division, and to the company as a whole, if top management forces the printing operation to accept the $0.007 per page transfer price when it has no available capacty, (Round answers to 2 decimal places, e.g 10.50 3- to the printing operation printing to the business books to the company Cioud Storage is Full

Explanation / Answer

Word Wizard

Printing should be done ‘Externally’.

Minimum transfer price = $0.010 per page

Since the Printing operation is booked entirely for the next 2 years, acceptance of the Business Books’ order would result in a loss of income from outside customer order.

Also, since the printing operation is working at full capacity, the loss of revenue of $0.010 per page from outside customer is an opportunity cost.

Hence, the transfer price to Business Book would be the loss of revenue from outside customer order - $0.010 per page.

However, the Business Book can get printing done at $0.009 per page from an outside printing provider, which is less than the transfer price (opportunity cost of $0.010).

Hence, Printing should be done outside.

Printing should be done ‘Internally’

Minimum transfer price = $0.006

Since the Printing operation has excess capacity, it can meet both the external customer order as well as the internal order from Business Book.

The availability of excess capacity allows the division to accept any order that meets its variable cost and earns a contribution.

The contribution to the Printing operation = sales price per page – varaible cost per page

Sales price per page = $0.010

Variable cost per page = $0.004

Hence, contribution margin per page = $0.006

Hence, the transfer price is $0.006 per page.

The price of printing externally is = 0.007

Comparatively, the price of printing externally is higher than the transfer price for printing internally.

Hence, printing should be done ‘Internally’ at a transfer price of $0.006 per page.

Loss to the printing operation – $2,250

Calculations -

Price per page from outside customer = $0.010

Transfer price per page for internal order = $0.007

Loss, on accepting the internal order = ($0.003) per page

Overall loss for printing 1,500 books, each of 500 pages = $0.003 x 500 x 1,500 = $2,250

Profit to the Business Books – $1,500

Calculations -

External Printing price = $0.009 per page

Internal transfer price = $0.007 per page

Gain from printing internally = $0.002 per page

Overall gain from printing 1,500 books, each of 500 pages internally = $0.002 x 500 x 1,500 = $1,500

Loss to the company –

Loss of Printing operation = ($2,250)

Gain of Business books =       $1,500

Overall loss to the company = ($750)

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