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Question 4 ABC Unicycle makes unicycles and has two divisions. Each division is evaluated as a profit center. The Wheel division, located in Nambia, produces unicycle wheels and can choose to sell wheels on either the open market at $30 per wheel, or sell them to the Assembly division. The Assembly division, located in Elbonia, assembles unicycles and can choose to either buy wheels from the Wheel division or purchase wheels on the open market. Cost per unit Direct Labour Variable Materials Variable Overhead Costs Fixed Overhead Costs* Wheel Division $2.00 3.00 4.00 5.00 Assembly Division $6.00 7.00 2,000 1,800 8.00 9.00 Other information Maximum capacity Current production volume (Fixed overhead costs are based on current production volumes) Required: A. What is the likely range of transfer prices between the Wheel Division and Assembly Division for an additional wheel? 3,000 2,600 B. What is the likely range of transfer prices per wheel between the Wheel Division and Assembly Division for an additional 420 wheels (hint: it is not the answer in part A x 420)? C. Assume that in future years that the Wheel Division will only sell wheels to the Assembly Division and no longer sell any wheels on the open market. Should the Wheel Division continue to be assessed as a profit centre? If it is not a profit centre, then how should it be evaluated? Explain your response.

Question 4 ABC Unicycle makes unicycles and has two divisions. Each division is evaluated as a profit center. The Wheel division, located in Nambia, produces unicycle wheels and can choose to sell wheels on either the open market at $30 per wheel, or sell them to the Assembly division. The Assembly division, located in Elbonia, assembles unicycles and can choose to either buy wheels from the Wheel division or purchase wheels on the open market. Cost per unit Direct Labour Variable Materials Variable Overhead Costs Fixed Overhead Costs* Wheel Division $2.00 3.00 4.00 5.00 Assembly Division $6.00 7.00 2,000 1,800 8.00 9.00 Other information Maximum capacity Current production volume (Fixed overhead costs are based on current production volumes) Required: A. What is the likely range of transfer prices between the Wheel Division and Assembly Division for an additional wheel? 3,000 2,600 B. What is the likely range of transfer prices per wheel between the Wheel Division and Assembly Division for an additional 420 wheels (hint: it is not the answer in part A x 420)? C. Assume that in future years that the Wheel Division will only sell wheels to the Assembly Division and no longer sell any wheels on the open market. Should the Wheel Division continue to be assessed as a profit centre? If it is not a profit centre, then how should it be evaluated? Explain your response.

Managerial Accounting
Managerial Accounting
15th Edition
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:Carl Warren, Ph.d. Cma William B. Tayler
Chapter10: Evaluating Decentralized Operations
Section: Chapter Questions
Problem 3CMA
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Question 4 ABC Unicycle makes unicycles and has two divisions. Each division is evaluated as a profit center. The Wheel division, located in Nambia, produces unicycle wheels and can choose to sell wheels on either the open market at $30 per wheel, or sell them to the Assembly division. The Assembly division, located in Elbonia, assembles unicycles and can choose to either buy wheels from the Wheel division or purchase wheels on the open market. Cost per unit Direct Labour Variable Materials Variable Overhead Costs Fixed Overhead Costs* Other information Maximum capacity Current production volume Wheel Division $2.00 3.00 4.00 5.00 2,000 1,800 Assembly Division $6.00 7.00 8.00 9.00 3,000 2,600 (* Fixed overhead costs are based on current production volumes) Required: A. What is the range of transfer prices between the Wheel Division and Assembly Division for an additional wheel? B. What is the likely range of transfer prices per wheel between the Wheel Division and Assembly Division for an additional 420 wheels (hint: it is not the answer in part A x 420)? C. Assume that in future years that the Wheel Division will only sell wheels to the Assembly Division and no longer sell any wheels on the open market. Should the Wheel Division continue to be assessed as a profit centre? If it is not a profit centre, then how should it be evaluated? Explain your response. Question 5 (Continuation of Question 4) Suppose that the tax rate in Nambia is 10% and the tax rate in Elbonia is 30%. From the quantitative point of view of the head office, what is the optimal transfer price for a single wheel?
Transcribed Image Text:Question 4 ABC Unicycle makes unicycles and has two divisions. Each division is evaluated as a profit center. The Wheel division, located in Nambia, produces unicycle wheels and can choose to sell wheels on either the open market at $30 per wheel, or sell them to the Assembly division. The Assembly division, located in Elbonia, assembles unicycles and can choose to either buy wheels from the Wheel division or purchase wheels on the open market. Cost per unit Direct Labour Variable Materials Variable Overhead Costs Fixed Overhead Costs* Other information Maximum capacity Current production volume Wheel Division $2.00 3.00 4.00 5.00 2,000 1,800 Assembly Division $6.00 7.00 8.00 9.00 3,000 2,600 (* Fixed overhead costs are based on current production volumes) Required: A. What is the range of transfer prices between the Wheel Division and Assembly Division for an additional wheel? B. What is the likely range of transfer prices per wheel between the Wheel Division and Assembly Division for an additional 420 wheels (hint: it is not the answer in part A x 420)? C. Assume that in future years that the Wheel Division will only sell wheels to the Assembly Division and no longer sell any wheels on the open market. Should the Wheel Division continue to be assessed as a profit centre? If it is not a profit centre, then how should it be evaluated? Explain your response. Question 5 (Continuation of Question 4) Suppose that the tax rate in Nambia is 10% and the tax rate in Elbonia is 30%. From the quantitative point of view of the head office, what is the optimal transfer price for a single wheel?
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