8 CHAPTER 10 4) Tractor Division Graham Motors manufactures specialty tractors.

Question

8 CHAPTER 10 4) Tractor Division Graham Motors manufactures specialty tractors. It has two divisions: a and a Tire Division. The Tractor Division can The market price per tire is $45. The Tire Division has the following costs per tire: use the tires produced by the Tire Division. Direct material cost per tire $22 Conversion costs per tire $5 Fixed manufactuing overhead cost for the yearis expected to total s rhead Division expects to manufacture 40,000 tires this year. The fixed manufacturing ove per tire is $3 ($120,000 divided by 40,000 tires). Requirements 1. Assume that the Tire Division has excess capacity, meaning that it can produce tires for the Tractor Division without giving up any of its current tire sales to outsiders. If Graham Motors has a negotiated transfer price policy, what is the lowest acceptable 2. If Graham Motors has a cost-plus transfer price policy of full absorption cost plus 30% 3. If the Tire Division is currently producing at capacity (meaning that it is selling every transfer price? What is the highest acceptable transfer price? what would the transfer price be? single tire it has the capacity to produce), what would likely be the fairest transfer price strategy to use? What would be the transfer price in this case? E10-25A Comprehensive flexible budget problem (Learning Objectives 2 & 5) The Happy Balloon Company produces party balloons that are sold in multi-pack cases To follow is the company's performance report in contribution margin format for August: 2 The Happy Balloon Company Actual vs. Budget Performance Report

Explanation / Answer

1. The lowest acceptable transfer price to the selling division under the negotiate price strategy is the variable cost of producing and selling the product. So the Tire Division's variable cost is the total of the direct material cost per tire and conversion costs per tire.

Variable cost = DM cost per tire + Conversion Cost per tire

Variable cost = $ 22+$ 5 = $27 per tire

Again under the negotiate price strategy, the highest acceptable price to the buying division will be the market price per tire which is $45 per tire

2. Tire Division is using the full absorption cost plus a 30% mark­up. It includes the variable cost and fixed manufacturing overhead cost. We can Compute the transfer price under this scenario as follows,

Transfer Price per tire = (Variable cost per tire + Fixed Manufacturing overhead cost per tire) X (1 +Markup)

($27 +$3) X (1+0.3)

$30 X 1.3 = $39

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