Wentworth Company Has Two Divisions

question 36

Essay

Wentworth Company has two divisions.The Bottle Division produces products that have variable costs of $3 per unit.Its 2010 sales were 150 000 to outsiders at $5 per unit and 40 000 units to the Mixing Division at 140% of variable costs.Under a dual transfer-pricing system,the Mixing Division pays only the variable cost per unit.The fixed costs of the Bottle Division are $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 the Bottle Division.The annual fixed costs of Mixing were $85 000.There was no beginning or ending inventories during the year.
Required:
What are the operating profits of the two divisions and the company as a whole for the year? Explain why the company's operating profit is less than the sum of the two divisions' total profits.
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Definitions:

Inventory Costing

The method used to value and account for inventory, including approaches such as LIFO, FIFO, and weighted average cost.

Cost of Goods Sold

Direct costs attributable to the production of goods sold by a company, including materials and labor costs.

Sales

The transactions involved in selling goods or services to customers, often tracked to measure business performance.

Goodwill

An intangible asset representing the value of a company's brand, customer relationships, and other non-physical assets acquired during a purchase.