Plank IncHas a Division That Makes Paint and Another Division That

question 75

Essay

Plank Inc.has a division that makes paint and another division that constructs subdivisions.The paint division incurs the following costs for one litre of paint: $\begin{array}{lr}\text { Direct materials } & \$ 1.10 \\\text { Direct labour } & 1.45 \\\text { Variable overhead } & 0.90 \\\text { Fixed overhead } & 1.15 \\\text { Total } & \$ 4.60\end{array}$ The Paint Division can make 1,000,000 L per year,and expects to produce 800,000 L next year.The Construction Division currently buys 200,000 L of paint from an outside supplier for $5.30 per litre (the same price that the Paint Division receives). A. The maximum transfer price per litre of paint is $\$\_\_\_\_$ .
B. The minimum transfer price per litre of $p$ aint is $\$\_\_\_\_$ .
C. Assume that the transfer takes place at $\$ 5$ per litre; calcul ate the amount by which each of
the following will be better off with the transfer than without it.
Paint Division: $\$\_\_\_\_$
Construction Division: $\$\_\_\_\_$
Plank, Inc., as a whole: $\$\_\_\_\_$

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Definitions:

Marginal Utility

The augmented satisfaction or value derived from the consumption of one extra unit of a product or service.

Total Utility

Measures the total satisfaction or benefit that a person derives from consuming a certain quantity of a good or service.

Utility Schedule

A table showing the different levels of utility or satisfaction derived from consuming varying amounts of a good or service.

Marginal Utility

The boost in satisfaction or usefulness one gets from consuming an extra unit of any good or service.