Questions 18-22 [Objective 3] – HFD 14th edition Test Bank pgs 18 – 19

Answer the following questions using the information below:

Calculate the Division operating income for the Artic Air Company which manufactures only
one type of air conditioner and has two divisions, the Compressor Division, and the Assembly
Division. The Compressor Division manufactures compressors for the Assembly Division, which
completes the air conditioner and sells it to retailers. The Compressor Division "sells"
compressors to the Assembly Division. The market price for the Assembly Division to purchase
a compressor is $38.50. (Ignore changes in inventory.) The fixed costs for the Compressor
Division are assumed to be the same over the range of 5,000-10,000 units. The fixed costs for the
Assembly Division are assumed to be $7.50 per unit at 10,000 units.

Compressor's costs per compressor are:

Direct materials $17.00
Direct labor $7.25
Variable overhead $3.00
Division fixed costs $7.50

Assembly's costs per completed air conditioner are:

Direct materials $150.00
Direct labor $62.50
Variable overhead $20.00
Division fixed costs $7.50

18) What is the market-based transfer price per compressor from the Compressor Division to the
Assembly Division?

19) What is the transfer price per compressor from the Compressor Division to the Assembly
Division if the method used to place a value on each compressor is 150% of variable costs?

20) What is the transfer price per compressor from the Compressor Division to the Assembly
Division if the transfer price per compressor is 110% of full costs?

21) Assume the transfer price for a compressor is 150% of total costs of the Compressor Division
and 1,000 of the compressors are produced and transferred to the Assembly Division. The
Compressor Division's operating income is:

22) If the Assembly Division sells 1,000 air conditioners at a price of $375.00 per air conditioner
to customers, what is the operating income of both divisions together?