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Managerial Accounting

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Moderate

Transfer Decision - Excess Capacity

MGRACT-VVWL6E

Simon Co. has two divisions, A and B. For one of the company's products, Division A produces a subassembly and Division B incorporates this subassembly into the final product. There is a market for both the subassembly and the final product. Division A's production capacity is 7,000 units, but sales to its market is limited to 5,000 units.

The following information is available:

Estimated selling price for final product -- \$400 per unit
Average market price for subassembly -- \$300 per unit
Variable cost in Division A -- \$200 per unit
Additional variable cost for completion in Division B -- \$250 per unit

If 2,000 units are produced and transferred to Division B (in addition to the 5,000 units sold to the outside market), the company would be:

A

Worse off by \$150 per unit

B

Worse off by \$50 per unit

C

Better off by \$150 per unit

D

Better off by \$50 per unit