1. Determine the minimum transfer price that Cutting Division would accept.2. Determine the maximum transfer price that the Assembly Division would pay.3. If Cutting Division will accept the offer of Assembly Division, how much is the change in its operating income ?4. If Cutting Division will make a counter offer of P45.25 per part, how much is the change in the operating income of Assembly Division assuming that its external supplier could not supply its needed quantity? The Cutting Division produces a part that is used by the Assembly Division. The cost ofmanufacturing the part is as follows:P 10Direct materialsDirect labor25% of direct materials30% of prime costVariable overheadFixed overheadP 2.0 Based on practical volume of 80,000 partsOther costs incurred by the Assembly Division are:Variable selling expenses5% of sales priceP 200,000Fixed selling & administrative expensesThe pricing of the part in the external market is within the P47-50 range; however, the averageprice for the external market is P48. The maximum capacity is 100,000 parts, but in recentyears, they have been operating at 80% capacity. There are no interdepartmental sellingcharges. In the coming year, the Assembly Division received advanced orders of 85,000 parts.If bought from third-party sources, the part will cost P47 each. The manager of the AssemblyDivision has offered to buy 85,000 parts from the Cutting Division for P45 per unit.

Ans 1. Minimum transfer price cutting division would accept = Its variable cost being incurred to…

Answered: Determine the minimum transfer price…

Principles of Accounting Volume 2

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ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter5: Process Costing

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1. Determine the minimum transfer price that Cutting Division would accept.

2. Determine the maximum transfer price that the Assembly Division would pay.

3. If Cutting Division will accept the offer of Assembly Division, how much is the change in its operating income ?

4. If Cutting Division will make a counter offer of P45.25 per part, how much is the change in the operating income of Assembly Division assuming that its external supplier could not supply its needed quantity?

The Cutting Division produces a part that is used by the Assembly Division. The cost of
manufacturing the part is as follows:
P 10
Direct materials
Direct labor
25% of direct materials
30% of prime cost
Variable overhead
Fixed overhead
P 2.0 Based on practical volume of 80,000 parts
Other costs incurred by the Assembly Division are:
Variable selling expenses
5% of sales price
P 200,000
Fixed selling & administrative expenses
The pricing of the part in the external market is within the P47-50 range; however, the average
price for the external market is P48. The maximum capacity is 100,000 parts, but in recent
years, they have been operating at 80% capacity. There are no interdepartmental selling
charges. In the coming year, the Assembly Division received advanced orders of 85,000 parts.
If bought from third-party sources, the part will cost P47 each. The manager of the Assembly
Division has offered to buy 85,000 parts from the Cutting Division for P45 per unit.

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