The Devon Motor Company produces automobiles. On April 1, the company had no beginning inventories, and it purchased 6,730 batteries at a cost of $115 per battery. It withdrew 6,200 batteries from the storeroom during the month. Of these, 100 were used to replace batteries in cars being used by the company’s traveling sales staff. The remaining 6,100 batteries withdrawn from the storeroom were placed in cars being produced by the company. Of the cars in production during April, 90 percent were completed and transferred from work in process to finished goods. Of the cars completed during the month, 30 percent were unsold at April 30.
Required:
1. and 2. Determine the cost of batteries that would appear in each of the following accounts on April 30 and select whether each of the accounts would appear on the balance sheet or on the income statement.
The Devon Motor Company produces automobiles. On April 1, the company had no beginning inventories, and it purchased 6,730 batteries at a cost of $115 per battery. It withdrew 6,200 batteries from the storeroom during the month. Of these, 100 were used to replace batteries in cars being used by the company’s traveling sales staff. The remaining 6,100 batteries withdrawn from the storeroom were placed in cars being produced by the company. Of the cars in production during April, 90 percent were completed and transferred from work in process to finished goods. Of the cars completed during the month, 30 percent were unsold at April 30.
Required:
1. and 2. Determine the cost of batteries that would appear in each of the following accounts on April 30 and select whether each of the accounts would appear on the balance sheet or on the income statement.
Related questions
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 Divisionâs total operating income be higher or lower if it accepts the offer from Assembly Division? By how much?
Will American Car Companyâs total operating income be higher or lowerâand by how muchâif 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 Carâs 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.
