The Watch Company has two divisions and manufactures one type of watch. The two divisions are the production Division and the Package & Delivery, Division. The production Division manufactures watches and then sells them to the Package & Delivery Division, which packs the watches and sells them to retailers. The market price for the Package & Delivery Division to purchase this watch is £40. Production’s cost per watch are: £ Direct materials 6 Direct labour 7 Variable overhead 5 Division fixed cost 2 Package & Delivery’s cost per watch are: £ Direct materials 9 Direct labour 3 Variable overhead 4 Division fixed cost 16 Notes: Fixed costs shown above are per pair for 100,000 units. Assume the transfer price for a watch is 160% of full costs of the Production Division and 100,000 watches are produced and sold to the Package & Delivery Division. What is the Production Division's operating income? (2 marks) If the Package & Delivery Division purchases 100,000 watches from production departments and sells to retailers at a price of £150 per watch, what is the operating income of The Watch Company? (3 marks)
The Watch Company has two divisions and manufactures one type of watch. The two divisions are the production Division and the Package & Delivery, Division. The production Division manufactures watches and then sells them to the Package & Delivery Division, which packs the watches and sells them to retailers. The market price for the Package & Delivery Division to purchase this watch is £40. Production’s cost per watch are: £ Direct materials 6 Direct labour 7 Variable overhead 5 Division fixed cost 2 Package & Delivery’s cost per watch are: £ Direct materials 9 Direct labour 3 Variable overhead 4 Division fixed cost 16 Notes: Fixed costs shown above are per pair for 100,000 units. Assume the transfer price for a watch is 160% of full costs of the Production Division and 100,000 watches are produced and sold to the Package & Delivery Division. What is the Production Division's operating income? (2 marks) If the Package & Delivery Division purchases 100,000 watches from production departments and sells to retailers at a price of £150 per watch, what is the operating income of The Watch Company? (3 marks)
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
The Watch Company has two divisions and manufactures one type of watch. The two divisions are the production Division and the Package & Delivery, Division. The production Division manufactures watches and then sells them to the Package & Delivery Division, which packs the watches and sells them to retailers. The market price for the Package & Delivery Division to purchase this watch is £40.
|
Production’s cost per watch are: |
£ |
|
Direct materials |
6 |
|
Direct labour |
7 |
|
Variable |
5 |
|
Division fixed cost |
2 |
|
Package & Delivery’s cost per watch are: |
£ |
|
Direct materials |
9 |
|
Direct labour |
3 |
|
Variable overhead |
4 |
|
Division fixed cost |
16 |
Notes: Fixed costs shown above are per pair for 100,000 units.
- Assume the transfer price for a watch is 160% of full costs of the Production Division and 100,000 watches are produced and sold to the Package & Delivery Division. What is the Production Division's operating income? (2 marks)
- If the Package & Delivery Division purchases 100,000 watches from production departments and sells to retailers at a price of £150 per watch, what is the operating income of The Watch Company? (3 marks)
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