Question

Quinn Inc. has a number of divisions. One division, Style, makes zippers that are used in the manufacture of boots. Another division, LeatherStuff, makes boots that use the zippers and needs 90,000 zippers per year. Style incurs the following costs for one zipper: Direct materials $0.23 Direct labor 0.20 Variable overhead 0.95 Fixed overhead 1.32 Total $2.70 Quinn has capacity to make 950,000 zippers per year, but due to a soft market, only plans to produce and sell 620,000 zippers next year. LeatherStuff currently buys zippers from an outside supplier for $3.50 each (the same price that Style receives). Assume that Style and LeatherStuff have agreed on a transfer price of $3.25. What are the total cost savings for LeatherStuff?

Answer 1

Answer:

Cost saving per zipper

= External price - Agreed transfer price

= $3.50 - $3.25

= $0.25

Total cost saving

= $0.95 x 90,000 zippers

= $85,500

Explanation:

In this case, we need to calculate the saving per zipper which is external price minus agreed transfer price. Then, we will multiply the saving per zipper by the quantity of zipper required by LeatherStuff, which is 90,000 zippers.