Answer the Following Questions Using the Information Below:
Calculate the Division

question 60

Multiple Choice

Answer the following questions using the information below:
Calculate the Division operating profit for the Cool Air Company which manufactures only one type of air conditioner and has two divisions: the Compressor Division and the Assembly Division.The Compressor Division manufactures compressors for the Assembly Division,which completes the air conditioner and sells it to retailers.The Compressor Division 'sells' compressors to the Assembly Division.The market price for the Assembly Division to purchase a compressor is $77.(Ignore changes in inventory. ) The fixed costs for the Compressor Division are assumed to be the same over the range of 5000-10 000 units.The fixed costs for the Assembly Division are assumed to be $15.00 per unit at 10 000 units.
Compressor's costs per compressor are:
$\begin{array} { l r } \text { Direct materials } & \$ 34.00 \\ \text { Direct labour } & \$ 14.50 \\ \text { Variable overhead } & \$ 6.00 \\ \text { Division fixed costs } & \$ 15.00 \end{array}$

Assembly's costs per completed air conditioner are:
$\begin{array} { l r } \text { Direct materials } & \$ 300.00 \\ \text { Direct labour } & \$ 125.00 \\ \text { Variable overhead } & \$ 40.00 \\ \text { Division fixed costs } & \$ 15.00 \end{array}$
-What is the market-based transfer price per compressor from the Compressor Division to the Assembly Division?

• A)$54.50
• B)$34.00
• C)$69.50
• D)$77

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Definitions:

Natural Monopoly

A market condition where due to high fixed or start-up costs, efficient service is provided by a single firm instead of multiple competing firms, often seen in utilities sectors.

Fair-Return Price

For natural monopolies subject to rate (price) regulation, the price that would allow the regulated monopoly to earn a normal profit; a price equal to average total cost.

Allocatively Efficient

A state of resource allocation in which it is impossible to make any one individual better off without making someone else worse off.

Socially Optimal Price

The price of a good or service that reflects the external costs and benefits to society, aiming to achieve the most efficient allocation of resources.