Question

The Dubs division of Fast Company (the parent company) produces wheels for off-road sport vehicles. One-half of Dub's output is sold to the Hoon division of Fast; the remainder is sold to outside customers. Dub's estimated operating profit for the year is shown in the table.

	Internal Sales	External Sales	Totals
Sales	$300,000	$400,000	$700,000
Var Mfg.	$160,000	$160,000	$320,000
Var G&A	$40,000	$60,000	$100,000
CM	$100,000	$180,000	$280,000
Fixed Mfg.	$24,000	$32,000	$56,000
Fixed G&A	$36,000	$48,000	$84,000
Op. Profits	$40,000	$100,000	$140,000
Unit Sales	1,000	1,000	2,000

Unless otherwise stated assume the fixed costs given above are allocated costs and unavoidable. Hoon division has an opportunity to purchase 1,000 wheels of the same quality from an outside supplier on a continuing basis for $250.00 per wheel.

What would be the full manufacturing cost of a wheel in the Dubs division if production were increased by 50% both for transfer to Hoon and for external sales? Assume there are no capacity constraints. Round to the nearest $0.01.

What is the full manufacturing cost of a wheel in the Dubs division given the current level of production?

What would be the total contribution margin in the Dubs division if production were increased by 50% both for transfer to Hoon and for external sales? Assume there are no capacity constraints. Round to the nearest $0.01

Assume the Dubs division has excess production capacity but can only sell 1,000 units to external customers. What would be the change in Fast’s total operating profit if it allows the transfer from Dubs to Hoon to occur at the $250.00 price?

What would be the net effect on Fast Company’s total profits if Fast Company allows the Hoon division to purchase the wheels it needs from the outside supplier and the maximum external demand for Dubs division’s wheels are 1,500 units? Indicate an increase in profits with a positive number and a decrease in profits with a negative number, e.g. -10000.

Answer 1

240.000 240.000 fixed my 24.020 3200 560202 Solution Given Variable expen expenses are variable peru unit and fixed expenses (unless stated) are unavoidable. Case It When production is increased (for 3000 wheels) by 50% to both div. Internal External Total Bater. Var Mia 4800 (tocmX1507) (160mmx1500) (Already allocated) Total mig. Cost 264000 my Cost per wheel 178.66 g Case I Total mig cost at cutient level of production Var Mfg. Icoors + Coorro fixed 24000 + 32020 mfg. Total Mfg. Cost (by cop wheels) Cost wheel 376000 188 $ per 2000 5360 22 ono 5360 3000 M 560020 37602 600 on 105000 Case Ul : When production increased by 50% in both div. Contribution margin will be Internal External Total Sales 45oooo 3.80 x 1503 (400x1500) (240000) (240000) (480.000) less: Ves: My Case T) less: Var G&A (Go One) (90000) (150.000) HoornX 1502 Gooox150% 150000 42000 Contribution Margin 27oou

Case TV: Total production increased by som jord units can be sold externally con x 1502 3000 units internally units are sold at 256 $ per unit. 500 000 ) : 280000 84010 100000 1400rn 30210 1000 Internal External Total Sales 40000 900000 (2x2x250] Loup x 400 less Var. Mfg. (320990) (16000) (48000) [ I Goon 2002 less: Var G&A (800) (6oooo) (140000) Loro X201 cm 1800m less: Fixed Mfg. (24.020) (32600) (56.000) less: Fixed &&A (36000) 148000) 400D Operating profit Unit Sales Overall operating prochet de concentru decreases from 404 unit prosit per unit. per Case I: Total Units 2000 units & external sales be 1500 units to only 500 units are sold internally & rest will be procured from outside. Internal External Total 660 02 125000 до 725000 Sales (500x250] [1500 x 400 (80000) (240) (320ooo) as my [lcore/ TEm x 2 same but internally Less : Var

Case TV: Total production increased by som jord units can be sold externally con x 1502 3000 units internally units are sold at 256 $ per unit. 500 000 ) : 280000 84010 100000 1400rn 30210 1000 Internal External Total Sales 40000 900000 (2x2x250] Loup x 400 less Var. Mfg. (320990) (16000) (48000) [ I Goon 2002 less: Var G&A (800) (6oooo) (140000) Loro X201 cm 1800m less: Fixed Mfg. (24.020) (32600) (56.000) less: Fixed &&A (36000) 148000) 400D Operating profit Unit Sales Overall operating prochet de concentru decreases from 404 unit prosit per unit. per Case I: Total Units 2000 units & external sales be 1500 units to only 500 units are sold internally & rest will be procured from outside. Internal External Total 660 02 125000 до 725000 Sales (500x250] [1500 x 400 (80000) (240) (320ooo) as my [lcore/ TEm x 2 same but internally Less : Var

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