Calculate and compare the difference in overall corporate net income between Scenario A and Scenario B if the Assembly Division sells 100,000 pairs of shoes for $60 per pair to customers

ACCOUNTING

Multiple Choice

Calculate the Division operating income for the BetaShoe Company which manufacturers only one type of shoe and has two divisions, the Sole Division, and the Assembly Division. The Sole Division manufactures soles for the Assembly Division, which completes the shoe and sells it to retailers. The Sole Division "sells" soles to the Assembly Division. The market price for the Assembly Division to purchase a pair of soles is $20. (Ignore changes in inventory.) The fixed costs for the Sole Division are assumed to be the same over the range of 40,000-100,000 units. The fixed costs for the Assembly Division are assumed to be $7 per pair at 100,000 units.


Sole's costs per pair of soles are:

Direct materials $4

Direct labor $3

Variable overhead $2

Division fixed costs $1


Assembly's costs per completed pair of shoes are:

Direct materials $6

Direct labor $2

Variable overhead $1

Division fixed costs $7


Calculate and compare the difference in overall corporate net income between Scenario A and Scenario B if the Assembly Division sells 100,000 pairs of shoes for $60 per pair to customers.

Scenario A: Negotiated transfer price of $15 per pair of soles

Scenario B: Market-based transfer price

a. $500,000 more net income under Scenario A

b. $500,000 of net income using Scenario B

c. $100,000 of net income using Scenario A.

d. none of the above

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