The Hogan Division of Reston Company makes and sells K7 motors that can either be sold to outside customers or transferred to the Jasper Division of Reston Company. The following data were supplied by the Hogan Division:$\begin{array}{lc}
\text { Selling price per K7 motor to outs ide customers. } & £ 115\
\text { Unit variable production cost. } &£ 75\
\text {Monthly production capacity. } &3,500 \text { motors}\
\end{array}$

The Jasper Division is currently purchasing similar motors from an outside supplier at £110 each. Instead, the Jasper Division would like to buy 1,200 of the K7 motors from Hogan next month.
-The Hogan Division has proposed a transfer price of £105 per motor. Suppose there is ample idle capacity at the Hogan Division so that transfers to the Jasper Division do not cut into sales to outside customers. If the Jasper Division acquires the 1,200 motors from the Hogan Division rather than from the outside supplier, the effect on the monthly net operating income of the company as a whole will be

Question

The Hogan Division of Reston Company makes and sells K7 motors that can either be sold to outside customers or transferred to the Jasper Division of Reston Company. The following data were supplied by the Hogan Division:$\begin{array}{lc}
  \text { Selling price per K7 motor to outs ide customers. } & £ 115\
 \text { Unit  variable production cost. } &£ 75\
 \text {Monthly production capacity.  } &3,500 \text { motors}\
\end{array}$
 
The Jasper Division is currently purchasing similar motors from an outside supplier at £110 each. Instead, the Jasper Division would like to buy 1,200 of the K7 motors from Hogan next month. 
-The Hogan Division has proposed a transfer price of £105 per motor. Suppose there is ample idle capacity at the Hogan Division so that transfers to the Jasper Division do not cut into sales to outside customers. If the Jasper Division acquires the 1,200 motors from the Hogan Division rather than from the outside supplier, the effect on the monthly net operating income of the company as a whole will be

Quizplus · Accepted Answer

If the Jasper Division acquires the 1,200 motors from the Hogan Division, they will save £5 per motor (£110 - £105). Therefore, their total savings will be £6,000 (£5 x 1,200 motors). Since the Hogan Division has ample idle capacity, there will be no impact on its net operating income. Hence, the net effect on the company's monthly net operating income will be an increase of £6,000 x 7 (since there are 7 other divisions in the company) = £42,000 increase.

The Hogan Division of Reston Company Makes and Sells K7