For Several Years,Patel Division Has Produced an Electronic Component That

question 130

Essay

For several years,Patel Division has produced an electronic component that it sells to Morrison Division at the prevailing market price of $27.Patel manufactures the component only for Morrison Division and has previously made no sales of this product to outside customers.The product is available from independent suppliers who would charge the Morrison Division $27 per unit.Patel Division currently produces and sells 30,000 of these components each year and also manufactures several other products.The following annual cost information was compiled after the close of 2010 operations,during which time Patel Division operated at full capacity:
$\begin{array}{lr}& \text { Cost per } \\\text { Patel Division (2010) } &\text { Component }\\\text { Direct materials } & \$ 9.00 \\\text { Direct labor (hourly basis) } & 11.20 \\\text { Variable overhead } & 5.00 \\\text { General fixed overhead of plant } & 12.40 \\\text { Traceable fixed overhead }(\$ 90,000 \div 30,000) & 3.00 \\\text { Variable shipping expenses } & 1.00 \\\text { Total unit cost } & \$ 41.60 \\\end{array}$
General fixed overhead represents allocated joint fixed costs such as building depreciation,property taxes,and salaries of production executives.If production of the components were discontinued,$72,000 of the annual traceable fixed overhead could be eliminated.The costs to be saved currently require cash outlays; the balance of traceable fixed overhead is equipment depreciation on machinery that could be used elsewhere in the plant.
a. Compute the incremental cost per unit of this product manufactured by Patel Division.
b. The division manager contends that producing the components to accommodate other divisions is a sound policy as long as variable costs are recovered by sales. Should Patel Division continue to produce the components for Morrison Division?

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Definitions:

Stereogenic Center

An atom in a molecule, often carbon, that is connected to four different groups, giving rise to stereoisomers due to the spatial arrangement of these groups.

Stereoisomer

Molecules that have the same molecular formula and sequence of bonded atoms but differ in the three-dimensional orientations of their atoms in space.

Drug Receptors

Specific molecular sites within the body that drugs interact with to produce a pharmacological effect.

Most Polar Molecule

The molecule with the highest difference in electronegativity between its atoms, leading to a significant dipole moment.