Question

Timekeeper Corporation has two divisions, Distribution and Manufacturing. The company's primary product is high-end watches. Each division's costs are provided below:

        Manufacturing:                Variable costs per unit                                                $1.36

                                                            Fixed costs per unit                   $5.77

        Distribution:                     Variable costs per unit                                                $1.30

                                                            Fixed costs per unit                   $0.50

The Distribution Division has been operating at a capacity of 4,009,000 units a week and usually purchases 2,004,500 units from the Manufacturing Division and 2,004,500 units from other suppliers at $13.00 per unit.

Assume 110,000 units are transferred from the Manufacturing Division to the Distribution Division for a transfer price of $8.00 per unit. The Distribution Division sells the 110,000 units at a price of $18 each to customers. What is the operating income of both divisions together?

	A.	$347,600
	B.	$392,150
	C.	$997,700
	D.	$634,700

Answer 1

Revenues (110,000 * $18)	$1,980,000
(-) cost	$982,300
Operating income	$997,700

Cost = (Manufacturing Division total cost per unit + Distribution division total cost per unit) *110,000

= ($1.36 + $5.77 + $1.30 + $0.50) * 110,000

= $8.93 * 110,000

= $982,300