BACHELOR OF ACCOUNTING

FACULTY OF ECONOMICS AND COMMUNICATION

BINA NUSANTARA UNIVERSITY
JAKARTA

ASSESSMENT METHOD

Shafa Azahra (2201833934)

Case Study:

Case 1 (70%)
Hairdo Products manufactures 30,000 units of part K-7 each year for use on its production line.
At The level of activity, the cost per unit for part K-7 is:

Direct materials . . . . . . . . . . . . . . . . . . . . . $ 4
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . $12
Variable manufacturing overhead . . . . . . . $5
Fixed manufacturing overhead . . . . . . . . . $12
Total cost per part . . . . . . . . . . . . . . . . . . . $25

An outside supplier has offered to sell 20,000 units of part K-7 each year to Hairdo Products for
$21 per part. If Hairdo Products accepts this offer, the facilities now being used to manufacture
part K-7 could be rented to another company at an annual rental of $100,000. However, Hairdo
Products has determined that two-thirds of the fixed manufacturing overhead being applied to
part K-7 would continue even if part K-7 were purchased from the outside supplier.
Required:
Prepare computations showing how much profits will increase or decrease if the outside
supplier’s offer is accepted.
BACHELOR OF ACCOUNTING
FACULTY OF ECONOMICS AND COMMUNICATION
BINA NUSANTARA UNIVERSITY
JAKARTA

Answer :
Per Unit 20.000 Units
Make Buy Make Buy
Cost of Purchasing $ 21 $ 420.000
Direct Material 4 $ 80.000
Direct Labor 12 240.000
Variable Manufacturing 5 100.000
Overhead
Fixed Manufacturing 4 80.000
Overhead
Rent 100.000
Total $ 25 $ 21 $ 600.000 $ 420.000

Profit will increase by $180.000 if the outside supplier’s offer is accepted.

Case 2 (30%)
Kaila Company’s Body Lotion Division produces a body lotion that is used by manufacturers of
various body butter products. Sales and cost data on the body lotion follow:

Selling price per unit on the intermediate market . . . . . . . . .$70

Variable costs per unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $45
Fixed costs per unit (based on capacity) . . . . . . . . . . . . . . . $10
Capacity in units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000

Number of body lotion:

Produced during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000
Sold to outside customers . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000
BACHELOR OF ACCOUNTING
FACULTY OF ECONOMICS AND COMMUNICATION
BINA NUSANTARA UNIVERSITY
JAKARTA

Kaila Company has a Body Butter Division that could use this body lotion in one of its products.
The Body Butter Division will need 5,000 body lotions per year. It has received a quote of $60
per body lotion from another manufacturer.

Required:
1. Assume that the Body Lotion Division is now selling only 20,000 body lotions per year
to outside customers. Can the selling division and buying division negotiate for the
transfer price? Calculate the lower and upper acceptable transfer price!
2. Assume that the Body Lotion Division is selling 28,000 of the body lotions it can produce
to outside customers. Can the selling division and buying division negotiate for the
transfer price? Calculate the lower and upper acceptable transfer price!
3. Assume that the Body Lotion Division selling all the speackers at cost to Body Butter
Division. Can they still get profit for their divison? Which one is better, negotiated
transfer price or transfer at cost for the selling division?

Answer :
1. The Body Lotion Devision selling 20.000/year
Lower Transfer Price

Transfer price ≥ Variable cost per unit + CM on Lost Sales

Number of units transferred

Transfer price ≥ $45 + 0

0
Transfer price ≥ $45
Higher Possible Transfer Price
Transfer price ≤ Cost of buying from outside supplier
Transfer price ≤ $60
 The range of transfer price : $45-$60
$ 45 ≤ x ≤ $60
2. The Body Lotion Division selling 28,000
BACHELOR OF ACCOUNTING
FACULTY OF ECONOMICS AND COMMUNICATION
BINA NUSANTARA UNIVERSITY
JAKARTA

Lower Transfer Price

Transfer price ≥ Variable cost per unit + CM on Lost Sales
Number of units transferred
Transfer price ≥ $45 + ($70 - $45) × 3000
5000
Transfer price ≥ 60
Higher possible transfer price
Transfer price ≤ Cost of buying from outside supplier
Transfer price ≤ 60
 The lower and higher transfer price is the same. So, customer and supplier can’t
negotiate a price. Transfer price = $60
3. Transfer tat cost = $ 45
Then, the price is transfer $ 45 - $ 60 if division body lotion sold all body lotion with a fee to
division body butter and the division will not make money. So, the transfer is better than the
transfer of the cost of sales division