Cornerstone Company Has Two Divisions

question 141

Essay

Cornerstone Company has two divisions. The Bottle Division produces products that have variable costs of $3 per unit. Its 20X5 sales were 140,000 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 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's operating income is less than the sum of the two divisions' total income.

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Definitions:

Bolivarian Socialism

A political and economic ideology based on the visions of South American liberator Simón Bolívar, focusing on the redistribution of wealth, land reform, and nationalization of key industries.

Laissez-Faire

A hands-off approach to economic policy where government intervention in business affairs is minimized.

Market System Characteristics

Features distinctive to market economies, such as private property, profit motive, consumer sovereignty, and competition.

Specialization

The concentration of the productive efforts of individuals or firms on a limited number of activities, leading to increased efficiency.