Nova Company Has Two Divisions: OPA Division and LPA Division

question 46

Multiple Choice

Nova Company has two divisions: OPA Division and LPA Division. The OPA Division manufactures a single product, presently operates at 95 per cent of full capacity (100 000 units) and can sell all 95 000 units produced to outside customers. This product is also a component used in a product made by the LPA Division. OPA's full cost of production is $22.50 per unit, including $4.50 of applied fixed overhead costs. The applied fixed overhead is calculated based upon production of 95 000 units. OPA's management believes that production can be raised to 100 000 units without affecting cost behaviour. OPA's selling price per unit is $30 with a 10 per cent sales commission on outside sales. LPA is presently negotiating the purchase of units from OPA. LPA can purchase a comparable component outside for $29.
What is the minimum acceptable transfer price for the first 5000 units from the viewpoint of OPA's management?

• A) $18.00
• B) $22.00
• C) $27.00
• D) $27.80

Understand the basic principles of cost-volume-profit (CVP) analysis and its limitations.

Calculate and interpret the break-even point in units and dollars.

Apply sensitivity analysis to assess changes in profit related to variations in selling prices, costs, and volume.

Determine operating leverage and its impact on profits.

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Definitions:

Relative Area

A term often used in chromatography and spectroscopy to compare the size or intensity of features such as peaks or signals, relative to others in a dataset.

Signals

In the context of science and technology, signals represent variations in a physical quantity or quantities that convey information.

Splitting

A phenomenon observed in NMR spectroscopy where a signal is divided into multiple peaks due to interactions between nuclear spins.

Signals

In spectroscopy, the representations of energy interactions with samples, providing information about molecular structure.