Problem: Calculate the Division operating income for the Beta Shoe Company which manufactures only one type of shoe and has two divisions, the Sole Division, and the Assembly Division. The Sole Division manufactures soles for the Assembly Division, which completes the shoe and sells it to retailers. The Sole Division "sells" soles to the Assembly Division. The market price for the Assembly Division to purchase a pair of soles is $20. (Ignore changes in inventory.) The fixed costs for the Sole Division are assumed to be the same over the range of 40,000-100,000 units. The fixed costs for the Assembly Division are assumed to be $7 per pair at 100,000 units.
Sole's costs per pair of soles are:
Direct materials $4
Direct labor $3
Variable overhead $2
Division fixed costs $1
Assembly's costs per completed pair of shoes are:
Direct materials $6
Direct labor $2
Variable overhead $1
Division fixed costs $7
If the Assembly Division sells 100,000 pairs of shoes at a price of $60 a pair to customers, what is the operating income of both divisions together?