Answer the following question(s)using the information below.
Beta Shoe Ltd.manufactures only one type of shoe and has two divisions,the Sole Division,and the Assembly Division.The Sole Division manufactures soles for the Assembly Division,which completes the shoe and sells it to retailers.The Sole Division "sells" soles to the Assembly Division.The market price for the Assembly Division to purchase a pair of soles is $20.(Ignore changes in inventory. )The fixed costs for the Sole Division are assumed to be the same over the range of 40,000-100,000 units.The fixed costs for the Assembly Division are assumed to be $7 per pair at 100,000 units.
Sole's costs per pair of soles are:
Assembly's costs per completed pair of shoes are:

-Assume the transfer price for a pair of soles is 180% of total costs of the Sole Division and 40,000 of soles are produced and transferred to the Assembly Division.The Sole Division's operating income is
A)$320,000.
B)$360,000.
C)$248,000.
D)$440,000.
E)$400,000.

Question

Answer the following question(s)using the information below.
Beta Shoe Ltd.manufactures only one type of shoe and has two divisions,the Sole Division,and the Assembly Division.The Sole Division manufactures soles for the Assembly Division,which completes the shoe and sells it to retailers.The Sole Division "sells" soles to the Assembly Division.The market price for the Assembly Division to purchase a pair of soles is $20.(Ignore changes in inventory. )The fixed costs for the Sole Division are assumed to be the same over the range of 40,000-100,000 units.The fixed costs for the Assembly Division are assumed to be $7 per pair at 100,000 units.
Sole's costs per pair of soles are:
  Assembly's costs per completed pair of shoes are:
 
-Assume the transfer price for a pair of soles is 180% of total costs of the Sole Division and 40,000 of soles are produced and transferred to the Assembly Division.The Sole Division's operating income is
A)$320,000. 
B)$360,000. 
C)$248,000. 
D)$440,000. 
E)$400,000.

Quizplus · Accepted Answer

Total cost per pair of soles for the Sole Division = fixed costs + variable costs = $220,000 ÷ 40,000 pairs + $4 = $9.5

Transfer price for a pair of soles = 180% of total costs = $17.1

Assembly Division's cost per completed pair of shoes = cost per pair of soles + fixed cost per pair of shoes = $17.1 + ($7 ÷ 2) = $20.1

Revenue for the Assembly Division from selling a pair of shoes = $20

Therefore, Assembly Division's profit per pair of shoes = Revenue - Cost per pair of shoes = $20 - $20.1 = -$0.1 (loss)

Sole Division's operating income = Revenue from selling soles - Total cost of producing soles = $17.1 x 40,000 pairs - $220,000 = $68,400

However, since the Assembly Division is operating at a loss, it might be beneficial for Beta Shoe Ltd to lower the transfer price to increase the profit margin of the Assembly Division.

Answer the Following Question(s)using the Information Below