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Im part b , in external material cost for division A, the answer includes 20000×200. I understand that 20000 is the remaining number of units after B’s outside sales and this number it sells to division A , but what is the 200$ cost there?where did they got it?
The question says that Division A pays $200 for fittings from Division B for each bath.
Fittings from division B ——–75$
But not 200$. 200$ is the other materials from external suppliers. Isnt it?The current costs of A for every bath are the amount to A (75) plus the amount for external fittings (200) plus the labour (which is show separately in the statement.
For part (b) of the question, it is assumed that the transfer price changes to $65 – the price that A can buy from outside (although as the answers says, it would be the same end result for any transfer price between 20 and 65).
In that case, the costs of each bath will be the amount to A or to external (65) plus the external fittings (200) (plus again the labour)
Division B has maximum production of 200,000 units and the external demand is 180,000.
So the sales to A will be the remaining 20,000.A has demand for 80,000. So 20,000 will be bought from A and 60,000 will be bought externally.
The 60,000 they buy externally will cost 265 payable externally.
The 20,000 they buy from A will also cost 265, but 200 will be paid externally and 65 will be paid to A (and the external and internal amounts are shown as separate lines in the profit statements).
(So the total costs of A = 80,000 x $265 = 21,200,000, of which 19,900,000 is paid externally and 1,300,000 is paid internally)
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