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acc-Busi294 Assignment-The Vancouver Leisure Company and others 5 problems




Question;Question 1 (18 marks)The Vancouver Leisure Company (VLC) sells extreme outdoor equipment, specialising indownhill and cross-country bikes, kayaks etc. VLC has a bike frame manufacturing division(FMD) that manufactures frames for bikes, and an Extreme Bike Sales division (EBS) thatadds all the other components imported from Europe (gears, wheels, seats etc.). Thetechnology that FMD utilizes is highly sought after but they do not have a monopoly. Bothdivisions are fully decentralized and autonomous profit centres.FMD?s cost of making an F18 bicycle frame is:Materials$150Labour325Overhead (based on maximum capacity) 145Variable selling costs90Cost per unit$710Variable selling costs include a commission to an independent sales representative of $50,$30 in packaging costs and $10 in delivery. Any sales to EBS will avoid packaging andcommission costs.FMD has fixed overhead of $180,000 and is able to manufacture and sell 4,000 frames a yearat a market price of $1,200.NOTE: Each bike requires one frame.Required ? Part 1a) EBS has a product called the Hollyburn bike. The Hollyburn is a high-end downhill bike thatutilizes an F18 frame. Assuming that demand for the Hollyburn bicycle is only 600 units thisyear and FMD has demand for 2,500 F18 frames from outside purchasers, what is theminimum transfer price that FMD is willing to accept from EBS? (2 marks)b) If FMD was able to sell all of its F18 frames to outside purchasers, what would be theminimum transfer price that they would accept from EBS? (2 marks)c) Assume that FMD has a demand of 3,500 F18 frames from outside purchasers. EBS hasestimated that it can sell 1,100 Hollyburns this year. What is the minimum transfer price,per frame, that FMD will accept from EBS for all 1,100 frames. (2 marks)Required - Part 2Assume that FMD can sell all of its production of F18 frames to outside purchasers but istransferring frames to EBS at $1,200. EBS has just received a special order from a customerto buy 300 bikes at a price of $3,800 per bike. EBS would incur an additional cost of $200 perbike to paint the bikes in a special chrome paint. The manager of EBS has excess capacity sos/he would very much like to fill the order. Currently, EBS sells its bikes at $4,500 generating acontribution margin of $1,000 per bike. The Manager of FMD has asked the Manager of EBSto let him increase the transfer price by $150 per bike in an effort to help his division out thisyear.a) What will be the change in the operating income of FMD assuming that the Manager of theEBS division agrees to increase the transfer price by $150? (3 marks)b) Assume that EBS takes the order at $3,800 per bike and grants a transfer price of $1,350.What will the effect be on EBS?s operating income? (2 marks)c) Is the Manager of EBS likely to accept the proposed increase in transfer price? Provide anexplanation. (3 marks)1d) Would this transaction be in the best interest of the company? Show your calculations.(2 marks)e) The two managers cannot agree on a transfer price and the special offer may be lost. Asthe CEO of VLC, would you get involved in the negotiation? Provide TWO reasons tosupport your position. The company?s net income last year was $900,000. (2 marks)Question 2 (12 marks)Porky Pig Ltd. (?PPL?) manufactures small home appliances. One of the company?s productlines is toasters, which it produces in three different models: standard, super, and deluxe.Each model, in turn, has two versions. (Thus, PPL manufactures six different toasters).The company currently produces all of the toasters? components. However, PPL has justreceived a proposal from a vendor (supplier) to supply PPL with the heating elements for thetoasters. The design and quality of the heating element is what distinguishes a higher qualitytoaster from a lower quality toaster. (PPL currently makes six different elements for the sixdifferent toasters.) The vendor has offered to supply all six different elements at a cost of$2.60 per element.PPL produces the elements in its factory in Raincouver, BC, along with all its other toastercomponents. For the coming year, PPL has projected an annual production volume of100,000 elements, with the costs as follows:Direct materials$75,000Direct labour$65,000Variable overhead$55,000Fixed overheadAmortization on equipment1$50,000$15,000Property taxes2Factory supervision3$34,970Total production costs$294,9701The equipment used to produce the elements has no alternative use and nomarket value.2The space occupied by the element production activities can be rented out for$1,000 a month.3This is the salary of the production supervisor who oversees the elementproduction. This individual would no longer be required if element productionceased.Required:(a)Determine the level of (annual) production at which PPL would be indifferent betweenmaking or buying the elements, assuming excess capacity exists. Based on yourcalculation, should they make or buy the heating elements? (6 marks)(b)Identify THREE other factors that the company should take into account in decidingwhether to make or buy the elements. (3 marks)(c)The company has an opportunity to sell an additional 10,000 elements to a foreigndistributor. PPL has the (excess) capacity to produce the additional quantity.(i) What is the minimum price that PPL should charge for the order? (1 mark)(ii) Assume that PPL is currently experiencing a $25,000 loss from operations (and ismaking its own heating elements). What price should PPL charge if it wishes tomake an overall profit of $5,000 from operations? (2 marks)


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