Module 10 Homework

Income Statements Segmented by Products
Clay Consulting Firm provides three types of client services in three health-care-related industries. The income statement for July is as follows:

The sales, contribution margin ratios, and direct fixed expenses for the three types of services are as follows:

Prepare income statements segmented by client categories. Include a column for the entire firm in the statement.

Internal or External Acquisitions:
No Opportunity Costs
The Van Division of MotoCar Corporation has offered to purchase 180,000 wheels from the Wheel Division for $43 per wheel. At a normal volume of 500,000 wheels per year, production costs per wheel for the Wheel Division are as follows:

The Wheel Division has been selling 500,000 wheels per year to outside buyers at $58 each. Capacity is 700,000 wheels per year. The Van Division has been buying wheels from outside suppliers at $56 per wheel.

(a) Calculate the net benefit (or cost) to the Wheel Division of accepting the offer from the Van Division.

(b) Calculate the net benefit (or cost) to Motocar Corp. if the Wheel Division accepts the offer from the Van Division.

Appropriate Transfer Prices: Opportunity Costs

Plains Peanut Butter Company recently acquired a peanut-processing company that has a normal annual capacity of 3,000,000 pounds and that sold 2,700,000 pounds last year at a price of $2.00 per pound. The purpose of the acquisition is to furnish peanuts for the peanut butter plant, which needs 700,000 pounds of peanuts per year. It has been purchasing peanuts from suppliers at the market price. Production costs per pound of the peanut-processing company are as follows:

Management is trying to decide what transfer price to use for sales from the newly acquired Peanut Division to the Peanut Butter Division. The manager of the Peanut Division argues that $2.00, the market price, is appropriate. The manager of the Peanut Butter Division argues that the cost price of $1.08 (or perhaps even less) should be used since fixed overhead costs should be recomputed. Any output of the Peanut Division up to 2,700,000 pounds that is not sold to the Peanut Butter Division could be sold to regular customers at $2.00 per pound.

(a) Compute the annual gross profit for the Peanut Division using a transfer price of $2.00.

(b) Compute the annual gross profit for the Peanut Division using a transfer price of $1.08.

(c) Which of the following is least likely to motivate the manager to take actions that will maximize corporate profits?