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Bodge co has 2 divisions, Pottery and Painting.Pottery division makes unglazed bowls that are then sold to Painting division for decoration and glazing.
The painting division sells completed bowls to the market for $50 each after incurring variable costs.
The pottery division has a fixed contract to sell 800 unglazed bowls each month for $30 each.The following monthly info is available for the pottery division
EXT SALES=$24000 @$30 WITH 800 UNITS
VAR COSTS=$12000
FIXED COSTS=$4000
Profit=$8000SALES TO PAINTING DIVISION
Sales Revenue=$25000 @25 WITH 1000 UNITS
Variable costs=$15000
Fixed costs =$4500
Profit=$5500The Painting division has been offered to source the unglazed bowls from an external supplier for $25 each
What would be the monthly drop in Profit of Pottery Division?
What what would be the effect of Bodge Co profit?One approach for finding the effect on profit is to deduct the supplier price of $24 from in house marginal cost of $15 hence an increase cost of $9(24-15)
Can we do it like this Profit of Painting Division=$8000 less Fixed costs of $4500 (Painting division) less buy in cost of $24000 (8000-24000-4500)=$20500 New Profit
Old profit =8000+5500=13500 Change in profit =20500-13500=$7000but i am confused that what would happen to fixed costs of $4500 if we accept the offer, shown in sales to pottery division and are these specific costs or not ?
NEED YOUR HELP PLEASE !
It is impossible for me to answer with certainty without seeing the whole question (if it is a past exam question, or a question in the BPP Revision Kit, then tell me which one).
On what you have written, it would appear that the total fixed costs of Pottery are $8,500 (how they have chosen to apportion them between external sales and sales to the other division is of no relevance).
Given that the pottery division will not be closing down, the fixed costs will remain at $8,500.
sir its kaplan kit question #222 and its not a past question its kits own question
sir the answers are
BODGE CO if accepts the offer
A)profits would increase by $9000
B)profits would increase by $15000
C)profits would decrease by $9000
D)profits would decrease by $14500and i have typed the complete information given !
and for the question regarding drop in monthly profit of division?
its answer is a net decease of $10000 !The answer is quite correct.
At the moment, the 1,000 units are costing the company $15 per unit to make.
If instead they are bought externally, they will cost $25 per unit – an extra $10 per unit.Therefore the costs to the company will increase by 1,000 x $10 = $10,000, and therefore the companys profit will fall by $10,000.
The fixed costs are irrelevant for the reason I wrote before.
Have you watched my free lectures on transfer pricing?
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