Gamma Division of Vaughn Corporation produces electric motors,20% of which are sold to Vaughan's Omega Division and 80% to outside customers.Vaughn treats its divisions as profit centers and allows division managers to choose whether to sell to or buy from internal divisions.Corporate policy requires that all interdivisional sales and purchases be transferred at variable cost.Gamma Division's estimated sales and standard cost data for the year ended December 31,based on a capacity of 60,000 units,are as follows:
A.Assuming that Gamma desires to maximize operating income,should it take on the new customer and discontinue sales to Omega? Why? (Note: Answer this question from Gamma's perspective. )
A.Yes.Gamma is currently selling motors to Omega at a transfer price of $55 per unit ($660,000 / 12,000 units).A price of $80 to the new customer will increase Gamma Division's operating income by $300,000 [($80 - $55)* 12,000 units].
B.Assume that Vaughn allows division managers to negotiate transfer prices.The managers agreed on a tentative price of $80 per unit,to be reduced by an equal sharing of the additional Gamma income that results from the sale to Omega of 12,000 motors at $80 per unit.On the basis of this information,compute the company's new transfer price.
B.The additional operating income to Gamma is $300,000 [($80 - $55)* 12,000 units].Splitting this amount equally results in a new transfer price of $67.50,calculated as follows:

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The Answer of Gamma Division of Vaughn Corporation produces electric motors,20% of which are sold to Vaughan's Omega Division and 80% to outside customers.Vaughn treats its divisions as profit centers and allows division managers to choose whether to sell to or buy from internal divisions.Corporate policy requires that all interdivisional sales and purchases be transferred at variable cost.Gamma Division's estimated sales and standard cost data for the year ended December 31,based on a capacity of 60,000 units,are as follows:
A.Assuming that Gamma desires to maximize operating income,should it take on the new customer and discontinue sales to Omega? Why? (Note: Answer this question from Gamma's perspective. )
A.Yes.Gamma is currently selling motors to Omega at a transfer price of $55 per unit ($660,000 / 12,000 units).A price of $80 to the new customer will increase Gamma Division's operating income by $300,000 [($80 - $55)* 12,000 units].
B.Assume that Vaughn allows division managers to negotiate transfer prices.The managers agreed on a tentative price of $80 per unit,to be reduced by an equal sharing of the additional Gamma income that results from the sale to Omega of 12,000 motors at $80 per unit.On the basis of this information,compute the company's new transfer price.
B.The additional operating income to Gamma is $300,000 [($80 - $55)* 12,000 units].Splitting this amount equally results in a new transfer price of $67.50,calculated as follows:

Gamma Division of Vaughn Corporation Produces Electric Motors,20% of Which