ACC 100 Lecture Notes - Lecture 5: Economic Surplus, Economic Equilibrium, Demand Curve
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The Assembly Division of American Car Company has offered to purchase 90,000 batteries from the Electrical Division of American Car for $100 per unit. At a normal volume of 250,000 batteries per year, production costs per battery are as follows:
| Direct materials | $ 40 |
| Direct manufacturing labor | 20 |
| Variable factory overhead | 12 |
| Fixed factory overhead | 40 |
| Total | $112 |
The Electrical Division has been selling 250,000 batteries per year to external buyers at $136 each; practical capacity is 340,000 batteries per year. If Assembly Division does not buy internally, then it will buy batteries from external sources for $130 each.
Will Electrical Division’s total operating income be higher or lower if it accepts the offer from Assembly Division? By how much?
Will American Car Company’s total operating income be higher or lower—and by how much—if Electrical Division accepts the offer, rather than rejecting it and forcing Assembly Division to buy the batteries from external sources?
Now suppose that Electrical Division has created a new product. Demand for this product would be sufficient to occupy the capacity which has been unused in the recent past and which might be used to supply batteries to Assembly. Electrical could produce and sell 90,000 units of this new product to external customers for a price of $98 per unit without reducing its current external battery sales of 250,000 units or changing its total fixed costs. Variable manufacturing costs for the new product would be $54 per unit. Is it better for American Cars if (a) Electrical Division makes the new product or (b) it uses the capacity to produce batteries for Assembly Division? By how much would American Car’s total contribution margin differ depending on whether (a) or (b) is chosen?
Given the information in question 3, what is the maximum transfer price that Assembly Division would be willing to pay and the minimum transfer price that Electrical Division would be willing to accept for the batteries?
If the division managers of the two divisions are left to negotiate the price, then is it likely that they will make the decision about internal trade that is best for American Cars? Explain briefly.
| [The following informationapplies to the questions displayed below.] |
| Cane Company manufactures two products called Alpha and Betathat sell for $155 and $115, respectively. Each product uses onlyone type of raw material that costs $6 per pound. The company hasthe capacity to annually produce 110,000 units of each product. Itsunit costs for each product at this level of activity are givenbelow:
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The company considers its traceable fixed manufacturing overheadto be avoidable, whereas its common fixed expenses are deemedunavoidable and have been allocated to products based on salesdollars. |
| 3. | Assume that Cane expects to produce and sell 87,000 Alphasduring the current year. One of Cane's sales representatives hasfound a new customer that is willing to buy 17,000 additionalAlphas for a price of $108 per unit. If Cane accepts the customer’soffer, how much will its profits increase or decrease?
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| 5. | Assume that Cane expects to produce and sell 102,000 Alphasduring the current year. One of Cane's sales representatives hasfound a new customer that is willing to buy 17,000 additionalAlphas for a price of $108 per unit. If Cane accepts the customer’soffer, it will decrease Alpha sales to regular customers by 9,000units. |
Calculate the incremental net operating income if the order isaccepted? (Loss amount should be indicated with a minussign.) |
| 6. | Assume that Cane normally produces and sells 97,000 Betas peryear. If Cane discontinues the Beta product line, how much willprofits increase or decrease? |
| 8. | Assume that Cane normally produces and sells 67,000 Betas and87,000 Alphas per year. If Cane discontinues the Beta product line,its sales representatives could increase sales of Alpha by 11,000units. If Cane discontinues the Beta product line, how much wouldprofits increase or decrease? |
| 9. | Assume that Cane expects to produce and sell 87,000 Alphasduring the current year. A supplier has offered to manufacture anddeliver 87,000 Alphas to Cane for a price of $108 per unit. If Canebuys 87,000 units from the supplier instead of making those units,how much will profits increase or decrease? |
| 10. | Assume that Cane expects to produce and sell 57,000 Alphasduring the current year. A supplier has offered to manufacture anddeliver 57,000 Alphas to Cane for a price of $108 per unit. If Canebuys 57,000 units from the supplier instead of making those units,how much will profits increase or decrease? |
| 11. | How many poundsof raw material are needed to make one unit of Alpha and one unitof Beta? |
| 12. What contribution margin per pound of raw material is earnedby Alpha and Beta? (Round your answers to 2 decimalplaces.)
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Assume that Cane’s customers would buy a maximum of 87,000 unitsof Alpha and 67,000 units of Beta. Also assume that the company’sraw material available for production is limited to 168,000 pounds.Up to how much should it be willing to pay per pound for additionalraw materials? (Round your answer to 2 decimalplaces.) |
