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Safari File Edit View History Bookmarks Window Help ??\' : 71% L\'?E ) Sat Jun 30 4:57 PM Alex ezto.mneducation.com 0? Home - alamo.edu Chapter 10 Exercises value: 11.11 points The Molding Division of Cotwold Company manufactures a plastic casing used by the Assembly Division. This casing is also sold to external customers for $33 per unit. Variable costs for the casing are $20 per unit and fixed cost is $4 per unit. Cotwold executives would like for the Molding Division to transfer 16,000 units to the Assembly Division at a price of $22 per unit. Assume that the Molding Division has enough excess capacity to accommodate the request. Required 1. Should the Molding Division accept the $22 transfer price proposed by management? C Yes No 2. Calculate the effect on Molding Division\'s net income if it accepts the $22 transfer price. ncome Hints References eBook & Resources afari.dmg 0

Solution

Cost of production=Variable Cost +Fixed cost

=$20 + $4 =$24

A transfer price of $22 is not acceptable.

2) if at all accepted $22per unit

Since there is excess Capacity there will not be an opportunity cost.

Effect on Net Income=Increase in sales revenue - Increase in Cost of production

=(22-24)×16,000units = (-32,000) decrese

Availability of surplus resource is an important factor.