Problem 1:

A. Division X Division Y Company

Sales at $1,600 $ 3,200,000 $ 3,200,000
Transfers at $1,100 $ 2,200,000 (2,200,000)
Less: Variable costs
at $850 (1,700,000)
at $600 (1,200,000) (2,900,000)
Contribution margin $ 500,000 $ (200,000) $ 300,000

Unit contribution margin $ 250 $ (100) $ 150

B. Alternative no. 1: Transfer 2,000 units to Division Y:

Company sales (2,000 x $1,600) $3,200,000

Less: Variable costs [2,000 x $850) + (2,000 x $600)] 2,900,000
Contribution margin $ 300,000

Alternative no. 2: Sell 1,000 units in the open market and transfer 1,000 units to Y:

Company sales [(1,000 x $900) + (1,000 x $1,600)] $2,500,000

Less: Variable costs [(2,000 x $850) + (1,000 x $600)] 2,300,000
Contribution margin $ 200,000

Division X should transfer all 2,000 units to Division Y to produce an additional

$100,000 ($300,000 - $200,000) of contribution margin.

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Problem 2:

A. The Phoenix divisional manager will likely be opposed to the transfer. Currently, the
division is selling all the units it produces at $520 each. With transfers taking place at $490,
Phoenix will suffer a $30 drop in sales revenue and profit on each unit that is sent to
Tucson.

B. Although Tucson is receiving a $30 "price break" on each unit purchased from Phoenix, the
$490 transfer price would probably be deemed too high. The reason: Tucson will lose $25
on each refrigeration system produced and sold.

Sales revenue $1,285

Less: Variable manufacturing costs $820
Transfer price paid to Phoenix 490 1,310
Income (loss) $ (25)

C. Kendall uses a responsibility accounting system, awarding bonuses based on divisional

performance. The two divisional managers (or their representatives) should negotiate a
mutually agreeable price. However, since the minimum acceptable price for Phoenix is
$520, it is impossible to agree on a transfer price that will result in a profit to Tucson.

D. Kendall would benefit more if it sells the condenser externally. Observe that the transfer
price is ignored in this evaluationone that looks at the firm as a whole.

Produce Produce Condenser;

Condenser; Sell Transfer; Sell
Externally Refrigeration System
Sales revenue $520 $1,285
Less: Variable cost
$380; $380 + $820 380 1,200
Contribution margin $140 $ 85

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 Question 3:

a) Theactualcostofmaterialperkilogramforthemonthwas:
$26,500/7,000kilograms=$3.75perkilogram

AQ(APSP)=Materialspricevariance
7,000kilograms($3.75SP)=$1,750favourable
$26,2507,000SP=$1,750favourable
7,000SP=$28,000
SP=$4.00

SP(AQFBQ)=Materialsquantityvariance
$4.00(7,000kgs.FBQ)=$2,000unfavourable
$28,000$4.00FBQ=$2,000unfavourable
$4.00FBQ=$26,000
FBQ=6,500kgs(Thisisthestandardquantityofmaterialsallowedfortheactualoutput)

SQ=6,500kgs./1,300units=5kgs.perunit.



b)

b)SR(AHSH)=Labourefficiencyvariance
$15(AH((1,300unitsx3hours))=$6,000favourable
$15AH$58,500=$6,000favourable
$15AH=$52,500
AH=3,500hours

Therefore,$55,125totalactuallabourcost/3,500hours=$15.75perhour.

AH(ARSR)=Labourratevariance
3,500hours($15.75$15.00)=$2,625unfavourable

Labourratevariance=$2,625U