Corporate policy at Weber Pty Ltd requires that all transfers between divisions be recorded at variable cost as a transfer price.Divisional managers have complete autonomy in choosing their sources of customers and suppliers.The Milling Division sells a product called RK2.Forty per cent of the sales of RK2 are to the Products Division,while the remainder of the sales are to outside customers.The manager of the Milling Division is evaluating a special offer from an outside customer for 10 000 units of RK2 at a per unit price of $15.If the special offer were accepted,the Milling Division would be unable to supply those units to the Products Division.The Products Division could purchase those units from another supplier for $17 per unit.Annual capacity for the Milling Division is 25 000 units.The 2008 budget information for the Milling Division,based on full capacity,is presented below.Assuming the Milling Division manager agrees to the special offer,what is the effect of the decision on the gross margin of Weber as a whole?

A) $20 000 decrease
B) $50 000 decrease
C) $30 000 increase
D) $50 000 increase

Question

Corporate policy at Weber Pty Ltd requires that all transfers between divisions be recorded at variable cost as a transfer price.Divisional managers have complete autonomy in choosing their sources of customers and suppliers.The Milling Division sells a product called RK2.Forty per cent of the sales of RK2 are to the Products Division,while the remainder of the sales are to outside customers.The manager of the Milling Division is evaluating a special offer from an outside customer for 10 000 units of RK2 at a per unit price of $15.If the special offer were accepted,the Milling Division would be unable to supply those units to the Products Division.The Products Division could purchase those units from another supplier for $17 per unit.Annual capacity for the Milling Division is 25 000 units.The 2008 budget information for the Milling Division,based on full capacity,is presented below.Assuming the Milling Division manager agrees to the special offer,what is the effect of the decision on the gross margin of Weber as a whole?

A) $20 000 decrease 
B) $50 000 decrease 
C) $30 000 increase 
D) $50 000 increase

Quizplus · Accepted Answer

If the Milling Division accepts the special offer, it will sell 10,000 units of RK2 to an outside customer for $15 per unit, resulting in a total revenue of $150,000. However, the Products Division will not be able to purchase those same units from the Milling Division and will have to purchase them from another supplier for $17 per unit, resulting in an additional cost of $20,000 for the Products Division. Since all transfers between divisions are recorded at variable cost as a transfer price, the Milling Division will only record variable cost for the 10,000 units sold to the outside customer, resulting in a gross margin reduction of $50,000 ((10,000 units x $30 variable cost per unit) - $150,000 revenue). Therefore, the decision will decrease the gross margin of Weber as a whole by $20,000 ($50,000 gross margin reduction in the Milling Division - $30,000 gross margin increase in the Products Division due to reduced cost of purchasing 10,000 units from an outside supplier).

Corporate Policy at Weber Pty Ltd Requires That All Transfers