Transfer prices and divisional profit
A chair manufacturer has two divisions: upholstering and framing. The framing costs are $100 per chair and upholstering costs are $200 per chair. The company makes 5,000 chairs every year, which are sold for $500.
Required:
A. Find the profit of each division if transfer price is $150?
B. Evaluate the profit of each division if transfer price is $200?
Performance measures for cost centers
A soft drink company has 3 bottling plants throughout the country. Bottling occurs at the regional level because of the high cost of convey bottled soft drinks. The parent company supplies every plant with the syrup. The bottling plants combine syrup with carbonated soda to make and bottle the soft drinks. The bottled soft drinks are then sent to local grocery stores. The bottling plants are treated as costs centers. The managers of the bottling plants are computed based on minimizing the cost per soft drink bottled and delivered. Every bottling plant uses the similar equipment, but some produce more bottles of soft drinks because of dissimilar demand. The costs and output for each bottling plant are:
A B C
Units Produced 10,000,000 20,000,000 30,000,000
Variable Costs $ 200,000 $ 450,000 $ 650,000
Fixed Costs $1,000,000 $1,000,000 $1,000,000
Required:
a. Evaluate the average cost per unit for every plant.
b. Why would manager of plant A be unhappy with using average cost as the performance measure?
c. Find an alternative performance measure that would make manager of plant A happier?
d. Under what circumstances may the average cost be a better performance measure?