Author Question: Cornerstone Company has two divisions. The Bottle Division produces products that have variable ... (Read 72 times)

09madisonrousseau09 · **on:** Mar 6, 2021

Question 1

When an industry has excess capacity, market prices may drop well below their historical average. If this drop is temporary, it is called ________.
◦ distress prices
◦ dropped prices
◦ low-average prices
◦ substitute prices

Question 2

Cornerstone Company has two divisions. The Bottle Division produces products that have variable costs of $3 per unit. Its 20X5 sales were 140,000 to outsiders at $5 per unit and 40,000 units to the Mixing Division at 140% of variable costs. Under a dual transfer-pricing system, the Mixing Division pays only the variable cost per unit. The fixed costs of the Bottle Division are $125,000 per year.

Mixing sells its finished products to outside customers for $11.50 per unit. Mixing has variable costs of $2.50 per unit in addition to the costs from the Bottle Division. The annual fixed costs of Mixing were $85,000. There were no beginning or ending inventories during the year.

Required:
What are the operating incomes of the two divisions and the company as a whole for the year? Explain why the company's operating income is less than the sum of the two divisions' total income.

fffftttt · **Reply #1 on:** Mar 6, 2021

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