Winton Industries Evaluates Its Divisions Based on Residual Income

question 29

Essay

Winton Industries evaluates its divisions based on residual income.The Springfield Division has the capacity to produce 20,000 units of a component.The Springfield Division's variable costs are $150 per unit;fixed costs are $110 per unit.The Monnett Division can use the product as a component in one of its products.The Monnett Division would incur $75 of variable costs to convert the component into its own product which sells for $300.Required:
(consider each question independent of each other):
a.Assume the Springfield Division can sell all that it produces for $285 each.The Monnett Division needs 1,000 units.What is the appropriate transfer price?
b.Assume the Springfield Division can sell 18,000 units at $285.Any excess capacity will be unused unless the units are purchased by the Monnett Division (which can use up to 1,000 units).What are the minimum and maximum transfer prices?

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Definitions:

Real Number

A value that represents a quantity along a continuous line, including both rational and irrational numbers.

True Inequality

A true inequality is an inequality statement that accurately describes the relationship between two values or expressions based on the given conditions.

Real Number

A value that represents a quantity along a continuous line, including all rational and irrational numbers.

Opposite Number

The number with the same magnitude but opposite sign to a given number, effectively located on the opposite side of zero on the number line.