The shuttle division of the Tandem Corporation produces circuit boards which are sold to the transistor radio division of the company, as well as to outside buyers. The income statement (in contribution format) for the past year for the division is given below.
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To the Transistor
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To Outside
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Radio Divison
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Buyers
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Sales:
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|
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20,000 units at $3.00
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$60,000
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|
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30,000 units at $4.00
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$120,000
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Variable expenses:
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$1.00
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20,000
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|
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$2.00
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|
60,000
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Contribution margin
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$40,000
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$ 60,000
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Fixed costs
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15,000
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30,000
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An outside supplier has just offered the manager of the transistor radio division to supply the circuit boards at $1.75 each. The manager of the shuttle division would not meet this price, arguing that it costs him $1.75 to manufacture and sell each unit of a circuit board. Assume that no additional sales can be made to outside buyers. Answer the following:
1. How did the shuttle division come up with the $1.75 unit cost figure?
2. Is the shuttle division required to meet the outside price of $1.75 for transistor radio sales?
3. Would you meet the $1.75 outside price if you were the manager of the shuttle division?