Bedtime Bedding Company manufactures pillows. The Cover Division makes covers and the Assembly Division makes the finished products. The covers can be sold separately for $5.00. The pillows sell for $6.00. The information related to manufacturing for the most recent year is as follows: Cover Division manufacturing costs$6,000,000Sales of covers by Cover Division4,000,000Market value of covers transferred to Assembly6,000,000Sales of pillows by Assembly Division7,200,000Additional manufacturing costs of Assembly Division1,500,000 Compute the operating income for each division and the company as a whole. Use market value as the transfer price. Are all managers happy with this concept? Explain

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Asked Dec 3, 2019
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Bedtime Bedding Company manufactures pillows. The Cover Division makes covers and the Assembly Division makes the finished products. The covers can be sold separately for $5.00. The pillows sell for $6.00. The information related to manufacturing for the most recent year is as follows:

 

Cover Division manufacturing costs

$6,000,000

Sales of covers by Cover Division

4,000,000

Market value of covers transferred to Assembly

6,000,000

Sales of pillows by Assembly Division

7,200,000

Additional manufacturing costs of Assembly Division

1,500,000

 

Compute the operating income for each division and the company as a whole. Use market value as the transfer price. Are all managers happy with this concept? Explain

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Expert Answer

Step 1

Compute the operating income for each division a...

Cover
Assembly
Company
Revenue
Sales to external parties
$4,000,000
$7,200,000 $11,200,000
Market value of covers
transferred from the
Cover Division to the
Assembly Division
$6.000.000
$10,000,000
$7,200,000 $11,200,000
Total
Manufacturing costs of
division
$6,000,000
s1,500,000
$7,500,000
Market value of covers
transferred from the
Cover Division to the
Assembly Division
Total
$6.000,000
$6,000,000
$7,500,000
$7,500,000
$3,700,000
Operating income
$4,000,000
$(300,000)
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Cover Assembly Company Revenue Sales to external parties $4,000,000 $7,200,000 $11,200,000 Market value of covers transferred from the Cover Division to the Assembly Division $6.000.000 $10,000,000 $7,200,000 $11,200,000 Total Manufacturing costs of division $6,000,000 s1,500,000 $7,500,000 Market value of covers transferred from the Cover Division to the Assembly Division Total $6.000,000 $6,000,000 $7,500,000 $7,500,000 $3,700,000 Operating income $4,000,000 $(300,000)

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