A jewelry company has several business units, including their Silver Processing unit and their Earrings unit. The Silver Processing unit typically sells all of its silver to external companies unless an internal division or business unit decides to use them as their supplier. The Earrings unit has decided to add a line of silver hoops to the line of gold hoops they have been selling for several years. Prior to this request, the Silver Processing unit reported the following numbers for the year: The Silver Processing unit has a capacity of 15,000 ounces of silver, and the Earrings unit has expressed an interest in purchasing 1,000 ounces from the Silver Processing unit. What is the total revenue generated on the ounces of silver sold to the Earrings unit?

Question

A jewelry company has several business units, including their Silver Processing unit and their Earrings unit. The Silver Processing unit typically sells all of its silver to external companies unless an internal division or business unit decides to use them as their supplier. The Earrings unit has decided to add a line of silver hoops to the line of gold hoops they have been selling for several years. Prior to this request, the Silver Processing unit reported the following numbers for the year:  The Silver Processing unit has a capacity of 15,000 ounces of silver, and the Earrings unit has expressed an interest in purchasing 1,000 ounces from the Silver Processing unit. What is the total revenue generated on the ounces of silver sold to the Earrings unit?

Quizplus · Accepted Answer

This question requires determination of the minimum acceptable transfer price if this sale takes the Silver Processing unit to capacity and surpasses it. That means there will be two acceptable prices. In order to calculate the minimum acceptable transfer price for the 600 (15,000 - 14,400) ounces in capacity, that would be equal to the variable cost per unit for those 600 ounces. This is calculated by dividing the variable expenses by the ounces of silver processed. $182,448/14,400 ounces = $12.67 per ounce. The remaining units in this order (if any), would have a minimum acceptable transfer price of the variable cost per unit plus the contribution margin per unit for the units that surpass the unit's capacity. This number would equal the market price per unit for those units. $12.67 + ($136,080/14,400 ounces) = $12.67 + $9.45 = $22.12 per ounce. The number of units at this price will be 1,000 - 600 = 400 ounces of silver. The total revenue will be (600 × $12.67) + (400 × $22.12) = $16,450.00 (Choice C).

A Jewelry Company Has Several Business Units, Including Their Silver