A Company Has Two Divisions

question 44

Essay

A company has two divisions.The Bottle Division produces products that have variable costs of $3 per unit.For the current year, sales were 150,000 to outsiders at $5 per unit and 40,000 units to the Mixing Division at 140 percent of variable costs.Under a dual transfer pricing system, the Mixing Division pays only the variable cost per unit.The fixed costs of Bottle Division were $125,000 per year.Mixing sells its finished products to outside customers for $11.50 per unit.Mixing has variable costs of $2.50 per unit in addition to the costs from Bottle.The annual fixed costs of Mixing were $85,000.There were no beginning or ending inventories during the year.Required:
What are the operating incomes of the two divisions and the company as a whole for the year? Explain why the company operating income is less than the sum of the two divisions' total income.

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Definitions:

Bidders

Individuals or entities that offer a price for goods, services, or assets in competitive situations such as auctions.

Common-value Auction

A type of auction wherein all bidders have the same valuation for the item for sale, but they have different information about the item’s actual value.

Exact Value

The precise numerical quantity or measurement without approximation.

Estimate

To make an approximate judgment or calculation of the value, number, quantity, or extent of something.