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Financial & Managerial Accounting
Found in: Page 1016
Financial & Managerial Accounting

Financial & Managerial Accounting

Book edition 7th
Author(s) John J Wild, Ken W. Shaw, Barbara Chiappetta
Pages 1096 pages
ISBN 9781259726705

Short Answer

The windshield division of Fast Car Co. makes windshields for use in Fast Car’s assembly division. The windshield division incurs variable costs of $200 per windshield and has capacity to make 500,000 windshields per year. The market price is $450 per windshield. The windshield division incurs total fixed costs of $3,000,000 per year. If the windshield division has excess capacity, what is the range of possible transfer prices that could be used on transfers between the windshield and assembly divisions? Explain.

The range of transfer price will be $200 to $450.

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Step by Step Solution

Definition of Fixed Cost

The cost incurred by the business entity that does not increase or decrease due to any change in activity level is known as a fixed cost.

Determination of transfer price

Here, the business entity is not operating at its full capacity. In that case, the transfer price's minimum value will equal the variable cost incurred to produce one windshield, and the maximum price will be equal to the market price. Therefore, the transfer price will fall between $200 to $450. Fixed cost is ignored because it is irrelevant.

Most popular questions for Business-studies Textbooks

Bonanza Entertainment began operations in January 2017 with two operating (selling) departments and one service (office) department. Its departmental income statements follow.

BONANZA ENTERTAINMENT

Departmental Income Statements

For Year Ended December 31, 2017

Particular

Movies

Video Games

Combined

Sales

$600,000

$200,000

$800,000

Cost of goods sold

420,000

154,000

574,000

Gross profit

180,000

46,000

226,000

Direct expenses

Sales salaries

37,000

15,000

52,000

Advertising

12,500

6,000

18,500

Store supplies used

4,000

1,000

5,000

Depreciation – equipment

4,500

3,000

7,500

Total direct expenses

58,000

25,000

83,000

Allocated expenses

Rent expenses

41,000

9,000

50,000

Utilities expenses

7,380

1,620

9,000

Share of office department expenses

56,250

18,750

75,000

Total allocated expenses

104,630

29,370

134,000

Total expenses

162,630

54,370

217,000

Net income

$17,370

($8,370)

$9,000

The company plans to open a third department in January 2018 that will sell compact discs. Management predicts that the new department will generate $300,000 in sales with a 35% gross profit margin and will require the following direct expenses: sales salaries, $18,000; advertising, $10,000; store supplies, $2,000; and equipment depreciation, $1,200. The company will fit the new department into the current rented space by taking some square footage from the other two departments. When opened, the new compact disc department will fill one-fourth of the space presently used by the movie department and one-third of the space used by the video game department. Management does not predict any increase in utilities costs, which are allocated to the departments in proportion to occupied space (or rent expense). The company allocates office department expenses to the operating departments in proportion to their sales. It expects the compact disc department to increase total office department expenses by $10,000. Since the compact disc department will bring new customers into the store, management expects sales in both the movie and video game departments to increase by 8%. No changes for those departments’ gross profit percents or for their direct expenses are expected except for store supplies used, which will increase in proportion to sales.

Required

Prepare departmental income statements that show the company’s predicted results of operations for calendar-year 2018 for the three operating (selling) departments and their combined totals. (Round percents to the nearest one-tenth and dollar amounts to the nearest whole dollar.)

National Bank has several departments that occupy both floors of a two-story building. The departmental accounting system has a single account, Building Occupancy Cost, in its ledger. The types and amounts of occupancy costs recorded in this account for the current period follow.

Depreciation - Building

$18,000

Interest -Building mortgage

27,000

Taxes – Building and land

9,000

Gas (heating) expenses

3,000

Lighting expenses

3,000

Maintenance expenses

6,000

Total occupancy cost

$66,000

The building has 4,000 square feet on each floor. In prior periods, the accounting manager merely divided the $66,000 occupancy cost by 8,000 square feet to find an average cost of $8.25 per square foot and then charged each department a building occupancy cost equal to this rate times the number of square feet that it occupied. Diane Linder manages a first-floor department that occupies 1,000 square feet, and Juan Chiro manages a second-floor department that occupies 1,800 square feet of floor space. In discussing the departmental reports, the second-floor manager questions whether using the same rate per square foot for all departments makes sense because the first-floor space is more valuable. This manager also references a recent real estate study of average local rental costs for similar space that shows first-floor space worth $30 per square foot and second-floor space worth $20 per square foot (excluding costs for heating, lighting, and maintenance).

Required

1. Allocate occupancy costs to the Linder and Chiro departments using the current allocation method.

2. Allocate the depreciation, interest, and taxes occupancy costs to the Linder and Chiro departments in proportion to the relative market values of the floor space. Allocate the heating, lighting, and maintenance costs to the Linder and Chiro departments in proportion to the square feet occupied (ignoring floor space market values).

Analysis Component

3. Which allocation method would you prefer if you were a manager of a second-floor department? Explain.

Harmon’s has several departments that occupy all floors of a two-story building that includes a basement floor. Harmon rented this building under a long-term lease negotiated when rental rates were low. The departmental accounting system has a single account, Building Occupancy Cost, in its ledger. The types and amounts of occupancy costs recorded in this account for the current period follow.

Building rent

$400,000

Lighting expenses

25,000

Cleaning expenses

40,000

Total occupancy cost

$465,000

The building has 7,500 square feet on each of the upper two floors but only 5,000 square feet in the basement. In prior periods, the accounting manager merely divided the $465,000 occupancy cost by 20,000 square feet to find an average cost of $23.25 per square foot and then charged each department a building occupancy cost equal to this rate times the number of square feet that it occupies.

Jordan Style manages a department that occupies 2,000 square feet of basement floor space. In discussing the departmental reports with other managers, she questions whether using the same rate per square foot for all departments makes sense because different floor space has different values. Style checked a recent real estate report of average local rental costs for similar space that shows first-floor space worth $40 per square foot, second-floor space worth $20 per square foot, and basement space worth $10 per square foot (excluding costs for lighting and cleaning).

Required

1. Allocate occupancy costs to Style’s department using the current allocation method.

2. Allocate the building rent cost to Style’s department in proportion to the relative market value of the floor space. Allocate to Style’s department the lighting and cleaning costs in proportion to the square feet occupied (ignoring floor space market values). Then, compute the total occupancy cost allocated to Style’s department.

Analysis Component

3. Which allocation method would you prefer if you were a manager of a basement department?

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