The Tortilla Chip business unit at Chipz Corp has reported the following results for years 1 and 2 of their operation: The Tortilla Chip business unit sold 69,870 bags in Year 1, and they sold 75,433 bags in Year 2. In the first year, they had an operating capacity of 75,000 bags and fulfilled a special order for an internal department of 12,465 bags. In the second year, they had an operating capacity of 80,000 bags and fulfilled a special order for an internal department of 14,788 bags. What is the difference in overall price for the special orders fulfilled for the internal department in years 1 and 2? (Round per unit cost to two decimal places.)
A) Year 1 is $6,923.87 higher than Year 2
B) Year 1 is $7,592.58 higher than Year 2
C) Year 2 is $6,923.87 higher than Year 1
D) Year 2 is $7,592.58 higher than Year 1

Question

The Tortilla Chip business unit at Chipz Corp has reported the following results for years 1 and 2 of their operation:  The Tortilla Chip business unit sold 69,870 bags in Year 1, and they sold 75,433 bags in Year 2. In the first year, they had an operating capacity of 75,000 bags and fulfilled a special order for an internal department of 12,465 bags. In the second year, they had an operating capacity of 80,000 bags and fulfilled a special order for an internal department of 14,788 bags. What is the difference in overall price for the special orders fulfilled for the internal department in years 1 and 2? (Round per unit cost to two decimal places.)
A) Year 1 is $6,923.87 higher than Year 2 
B) Year 1 is $7,592.58 higher than Year 2 
C) Year 2 is $6,923.87 higher than Year 1 
D) Year 2 is $7,592.58 higher than Year 1

Quizplus · Accepted Answer

This question requires calculation of the minimum acceptable price for both idle capacity and no idle capacity. This will result in two different minimum acceptable transfer prices. These calculations must be completed for both years. 
Year 1: To determine how many are subject to each price, subtract the sales from the high threshold of the capacity. 75,000 - 69,870 = 5,130 units can still be produced before hitting capacity. The minimum acceptable transfer price of the 5,130 units will be equal to the variable cost per unit, which is equal to $94,200/69,870 = $1.35 per unit. Any units produced with no idle capacity will have a minimum acceptable transfer price of the variable cost per unit plus the contribution margin per unit. Contribution margin = $84,703. Now, divide this by the units sold: $84,703/69,870 bags = $1.21 per unit. The minimum acceptable transfer price = $1.35 + $1.21 = $2.56 per unit. The number of units that will be charged at this price will be the total requested minus the units with idle capacity = 12,465 - 5,130 = 7,335 units. The total price that will be quoted is: (7,335 × $2.56) + (5,130 × $1.35) = $18,777.6 + $6,925.5 = $25,703.10.
Year 2: To determine how many are subject to each price, subtract the sales from the high threshold of the capacity. 80,000 - 75,433 = 4,567 units can still be produced before hitting capacity. The minimum acceptable transfer price of the 4,567 units will be equal to the variable cost per unit, which is equal to $103,343/75,433 = $1.37 per unit. Any units produced with no idle capacity will have a minimum acceptable transfer price of the variable cost per unit plus the contribution margin per unit. Contribution margin = $91,274. Now, divide this by the units sold: $91,274/75,433 = $1.21 per unit. The minimum acceptable transfer price = $1.37 + $1.21 = $2.58 per unit. The number of units that will be charged at this price will be the total requested minus the units with idle capacity = 14,788 - 4,567 = 10,221 units. The total price that will be quoted is: (10,221 × $2.58) + (4,567 × $1.37) = $26,370.18 + $6,256.79 = $32,626.97.Overall price difference: $32,626.97 - $25,703.10 = $6,923.87 (Choice C).

The Tortilla Chip Business Unit at Chipz Corp Has Reported