Mar Company has two decentralized divisions, X and Y. Division X has always purchased certain units from Division Y at $75 per unit. Because Division Y plans to raise the price to $100 per unit, Division X is seeking an outside supplier of the part for the old price of $75 per unit. Division Y's costs follow: * Y's variable costs per unit Y's annual fixed costs Y's annual production of these units for X. $70 $15,000 1,000 units If Division X buys from an outside supplier, the facilities Division Y uses to manufacture these units would be idle. What would be the result if the top management of Mar Company insists that Division X purchase from Division Y at a transfer price of $100 per unit? it would provide higher overall company net operating income than the old transfe price of $75 per unit. it would reduce the company's overall profit because Division X should buy from outside suppliers at $75 per unit if possible. it would provide lower overall company net operating income than the old transfer price of $75 per unit. it would be more profitable for the company than allowing X to buy from outside suppliers at $75 per unit.

Mar Company has two decentralized divisions, X and Y. Division X has always purchased certain units from Division Y at $75 per unit. Because Division Y plans to raise the price to $100 per unit, Division X is seeking an outside supplier of the part for the old price of $75 per unit. Division Y's costs follow: * Y's variable costs per unit Y's annual fixed costs Y's annual production of these units for X. $70 $15,000 1,000 units If Division X buys from an outside supplier, the facilities Division Y uses to manufacture these units would be idle. What would be the result if the top management of Mar Company insists that Division X purchase from Division Y at a transfer price of $100 per unit? it would provide higher overall company net operating income than the old transfe price of $75 per unit. it would reduce the company's overall profit because Division X should buy from outside suppliers at $75 per unit if possible. it would provide lower overall company net operating income than the old transfer price of $75 per unit. it would be more profitable for the company than allowing X to buy from outside suppliers at $75 per unit.

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter10: Evaluating Decentralized Operations

Section: Chapter Questions

Problem 17E: Materials used by the Instrument Division of Ziegler Inc. are currently purchased from outside...

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Morrill Company produces two different types of gauges: a density gauge and a thickness gauge. The segmented income statement for a typical quarter follows. Includes depreciation. The density gauge uses a subassembly that is purchased from an external supplier for 25 per unit. Each quarter, 2,000 subassemblies are purchased. All units produced are sold, and there are no ending inventories of subassemblies. Morrill is considering making the subassembly rather than buying it. Unit-level variable manufacturing costs are as follows: No significant non-unit-level costs are incurred. Morrill is considering two alternatives to supply the productive capacity for the subassembly. 1. Lease the needed space and equipment at a cost of 27,000 per quarter for the space and 10,000 per quarter for a supervisor. There are no other fixed expenses. 2. Drop the thickness gauge. The equipment could be adapted with virtually no cost and the existing space utilized to produce the subassembly. The direct fixed expenses, including supervision, would be 38,000, 8,000 of which is depreciation on equipment. If the thickness gauge is dropped, sales of the density gauge will not be affected. Required: 1. Should Morrill Company make or buy the subassembly? If it makes the subassembly, which alternative should be chosen? Explain and provide supporting computations. 2. Suppose that dropping the thickness gauge will decrease sales of the density gauge by 10 percent. What effect does this have on the decision? 3. Assume that dropping the thickness gauge decreases sales of the density gauge by 10 percent and that 2,800 subassemblies are required per quarter. As before, assume that there are no ending inventories of subassemblies and that all units produced are sold. Assume also that the per-unit sales price and variable costs are the same as in Requirement 1. Include the leasing alternative in your consideration. Now, what is the correct decision?
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