Nelcro Company has two divisions: Electrical and Motors. It evaluates its division managers on...


Nelcro Company has two divisions: Electrical and Motors. It evaluates its division managers on the basis of divisional profit.

The Electrical Division produces a high-quality transformer. Sales and cost data on the transformer follow.

Selling price per unit on the outside market: $45

Variable cost per unit: $23

Fixed cost per unit (based on capacity): $12

Capacity in units: 75,000

The Motors division currently purchases 5,000 transformers each year from an outside vendor at a cost of $44 each. It would like to begin purchasing the transformers from Electrical division.

a. Assume Electrical division sells 50,000 units a year to outside buyers. Compute the lowest price at which it would be willing to transfer the transformers to Motor division.

b. Assume that Electrical division currently sells all the transformers it can produce to outside buyers. Compute the amount by which corporate profit would change if it transferred 5,000 of these transformers to Motor division at a price of $42 each instead of selling them externally.

Relevant Costs for Special Internal Order:

Relevant costing principles in accepting or rejecting a special order does not apply to orders from outside customers only but to orders made by internal departments as well. The same principle applies in determining whether costs are relevant or not. Primarily, relevant costs are those which differs between various alternatives. Those which would have been incurred regardless of the alternative chosen are irrelevant. This section covers a situation of a special order from an internal department and explores how this can affect profitability of the company as a whole.

Answer and Explanation: 1

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1. Under the first assumption, the Electronics Division has excess capacity which would allow it to serve the need of the Motors Division without...

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Identifying Relevant Costs in Accepting an Order


Chapter 9 / Lesson 8

As orders sometimes come with increased costs, it is important to identify all relevant costs before accepting a given order. Learn the types of special orders, and the considerations for three types of cost: relevant, variable, and fixed costs.

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