EXERCISE 12-17 (20 MINUTES)

1. The variable cost of the new tube will be:

Direct materials... $ 60

Direct labor ... 49

Variable overhead (1/3 × $54) ... 18

Total variable cost ... $127

The lost contribution margin on outside sales will be:

Selling price (regular tubes) ... $170

Less variable expenses:

Direct materials ... $38

Direct labor ... 27

Variable overhead (25% × $40) ... 10

Variable selling and administrative* ... 5 80

Contribution margin per tube ... $ 90

*Total selling and administrative... $390,000

Less fixed portion ... 350,000

Variable portion ... $ 40,000

$40,000 ÷ 8,000 tubes = $5 per tube.

The lowest acceptable transfer price from the perspective of the selling

division is given by the following formula:

Total contribution margin on lost sales

Variable

Transfer price ≥ cost + Number of units transferred

$90 × 3,000

Transfer price $127+ = $127 + $108 = $235

≥