Task 1
Easton Corporation makes two different boat anchors—a traditional fishing anchor and a high-end
yacht anchor—using the same production machinery. The contribution margin of the yacht anchor is
three times as high as that of the other product. The company is currently operating at full capacity
and has been doing so for nearly two years. Bjorn Borg, the company’s CEO, wants to cut back on
production of the fishing anchor so that the company can make more yacht anchors. He says that
this is a “no-brainer” because the contribution margin of the yacht anchor is so much higher.
Required
Write a short memo to Bjorn Borg describing the analysis that the company should do before it
makes this decision and any other considerations that would affect the decision.
Task 2
Twyla Company operates a small factory in which it manufactures two products: C and D.
Production and sales results for last year were as follows.
Product C Product D
Units sold 9,000 20,000
Selling price per unit $95 $75
Variable cost per unit $50 $40
Fixed cost per unit $22 $22
For purposes of simplicity, the firm averages total fixed costs over the total number of units of C and
D produced and sold.
The research department has developed a new product (E) as a replacement for product D. Market
studies show that Twyla Company could sell 10,000 units of E next year at a price of $115; the
variable cost per unit of E is $40. The introduction of product E will lead to a 10% increase in
demand for product C and discontinuation of product D. If the company does not introduce the new
product, it expects next year’s results to be the same as last year’s.
Required
Should Twyla Company introduce product E next year? Explain why or why not. Show calculations
to support your decision.
Task 3
Crede Inc. has two divisions: Division A makes and sells student desks and Division B
manufactures and sells reading lamps.
Each desk has a reading lamp as one of its components. Division A can purchase reading lamps at
a cost of $10 from an outside vendor. Division A needs 10,000 lamps for the coming year.
Division B has the capacity to manufacture 50,000 lamps annually. Sales to outside customers are
estimated at 40,000 lamps for the next year. Reading lamps are sold at $12 each. Variable costs
are $7 per lamp and include $1 of variable sales costs that are not incurred if lamps are sold
internally to Division A. The total amount of fi xed costs for Division B is $80,000.
Required: Consider the following independent situations:
1. What should be the minimum transfer price accepted by Division B for the 10,000 lamps and
the maximum transfer price paid by Division A? Justify your answer.
2. Suppose Division B could use the excess capacity to produce and sell externally 15,000
units of a new product at a price of $7 per unit. The variable cost for this new product is $5
per unit. What should be the minimum transfer price accepted by Division B for the 10,000
lamps and the maximum transfer price paid by Division A? Justify your answer.
3. If Division A needs 15,000 lamps instead of 10,000 during the next year, what should be the
minimum transfer price accepted by Division B and the maximum transfer price paid by
Division A? Justify your answer