managerial accounting help ASAP?!?! ESSAY. Write your answer in the space provid
ID: 2566219 • Letter: M
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managerial accounting help ASAP?!?!
ESSAY. Write your answer in the space provided or on a separate sheet of paper. D (Appendix 11A) Larinore Corporation has a Castings Division that does casting work of various es. The company's Machine Products Division has asked the Castings Division to provide i 20,000 special castings each year on a continuing basis. The special castings would require $10 per typ with it in variable production costs. The Machine Products Division has a bid from an outside supplier of $29 per unit for the castings. In o rder to have time and space to produce the new castings, the Castings Division would have to cut ck p roduction of another casting: the RB4, which it presently is producing. The RB4 sells for unit, and requires $12 per unit in variable production costs. Boxing and shipping costso $36 f the RB er unit. Boxing and shipping costs for the new special casting would be only $1 per unit. The and shipping costs for the new special casting per boe only SI per unit. The are $4 p ompany is now producing and selling 100,000 units of the RB4 each year. Production and sales of this casting would drop by 20% if the new casting is produced Required: a) What is t result of agree e range of transfer prices within which both the divisions' profits would increase as a ing to the transfer of 20,000 castings per year from the Castings Division to the Machine Products Division? he best interests of Larinore Corporation for this transfer to take place? Explain I i in the sts of Larinore Corporation for this transfer to take placer ExolainExplanation / Answer
a) The problem is asking for the range within which transfer price should fall in order to maximize the profits of both divisions - Machine Division as well as Castings Division.
From the perspective of Casting Division:
The Casting Division, in case it chooses to produce special casting for Machine Division has to cover Two Different Costs -
i) It Needs to Cover the Cost of Production of special casting and making it available to the other division, and hence incurring Boxing and Shipping Costs for it.
The Cost of Production has been given as $10; and
The Boxing and Shipping Costs stand at $1
So Total Cost for special casting will be $ 14($13 + $1).
ii) For the production of special casting, the Casting Division has to Make Good the loss of Profit it will forego after abandoning the production of RB4 in order to justify the production.
On a given unit of RB4, Casting Division gets $30 as Sales Price while spending $12 as Variable Costs and another $4 as Boxing and Shipping Costs. That brings profit derived from sale of a single unit of RB4 as $14($30-12-4).
Hence, it also needs to recover at least $14 from the sale of special casting to forego the profit derived from the sales of RB4.
Hence, the Total Cost should be given as,
Total Cost per Unit = Per Unit Cost of Production and Distribution + Per Unit Profit Lost
= $11 + $14 = $25
From the perspective of Machine Products Division:
The Machine Products Division has been quoted a price of $29 by an outside supplier. Hence, any amount less than that i.e. $29 will be fine with the Machine Division.
Hence, after analyzing the perspectives of both divisions, it can be safely construed that the price should be higher than $25, but less than $29. Such a price will render the profit maximization objective of both units effective.
b) Such a transfer will definitely Add Value to Larinore Corp., since it results in a gain for both the divisions of the organization.
On one hand, the Casting Division will add profit after selling special casting to Machine Division at a price higher than the total cost of producing and covering the lost profits, while the Machine Division will benefit by procuring the special casting at a price less than it is getting from an outside vendor.
On a qualitative note, such arrangements often improve the synergies of the organization, and increase the self-sufficiency while decreasing dependence on outside suppliers in the market.
Thus, such an arrangement is surely in the best interests of the organization.
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