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Salamander Company Expects the Following Results in the Coming Period

Question 111

Essay

Salamander Company expects the following results in the coming period:
 Division ADivision B Sales A:(10,000×$160)$1,600,000($25,000×$72)$1,800,000 Variable costs 1,360,000900,000 Contribution margin $240,000$900,000 Fixed costs160,000360,000 profit $80,000$540,000\begin{array}{lcc}&\text { Division A} &&\text {Division B }\\ \text {Sales A:}(10,000 \times \$ 160)&\$1,600,000\\(\$ 25,000 \times \$ 72) & & \$ &1, 800,000\\\text { Variable costs } &\underline{ 1,360,000} &&\underline{ 900,000 }\\ \text { Contribution margin } & \$ 240,000& \$ & 900,000 \\ \begin{array}{l}\text { Fixed costs} \\\end{array} &\underline{ 160,000} & & \underline{360,000} \\ \text { profit } & \$80,000 & \$ &540,000 \\\end{array}
Included in Division A's costs are 10,000 units of a subcomponent purchased from an outside supplier for $45. The managers have recently initiated negotiations for Division B to supply the components to Division A. Division B has a total capacity of 40,000 units.
Required:
(a) Would the Salamander Company prefer the subcomponent used by A to be purchased internally from B or from the outside vendor?
(b) What would be the maximum and minimum transfer prices?

Correct Answer:

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(a)Division B variable cost = $900,000/2...

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