Question Details

What are the operating incomes of the two divisions 



1.	Sportswear Company manufactures socks.  The Athletic Division sells its socks for $6 a pair to outsiders.  Socks have manufacturing costs of $2.50 each for variable and $1.50 for fixed.  The division's total fixed manufacturing costs are $105,000 at the normal volume of 70,000 units.

	The European Division has offered to buy 15,000 socks at the full cost of $4.  The Athletic Division has excess capacity and the 15,000 units can be produced without interfering with the current outside sales of 70,000.  The 85,000 volume is within the division's relevant operating range.

	Explain whether the Athletic Division should accept the offer.

2.	Copperstone Company has two divisions.  The Bottle Division produces products that have variable costs of $3 per unit.  Its 20x3 sales were 150,000 to outsiders at $5 per unit and 40,000 units to the Mixing Division at 140% of variable costs.  Under a dual transfer-pricing system, the Mixing Division pays only the variable cost per unit.  The fixed costs of the Bottle Division are $125,000 per year.

	Mixing sells its finished products to outside customers for $11.50 per unit.  Mixing has variable costs of $2.50 per unit in addition to the costs from the Bottle Division.  The annual fixed costs of Mixing were $85,000.  There were no beginning or ending inventories during the year.

	Required:

	What are the operating incomes of the two divisions and the company as a whole for the year?  Explain why the company's operating income is less than the sum of the two divisions' total income.





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