Answer:
a) With a cost of $11, the operating income amounts to $660,000
b) If the cost is set at $9, the operating income is $540,000
c) Indeed, the manager is concerned with the chosen price. The Cutting Division operates as a cost center.
Explanation:
a) Cutting Assembly
Revenue $660,000 $2,500,000
Cost of services
Incurred $660,000 $360,000
Transferred-in $0 $660,000
Total $660,000 $1,020,000
Operating income $0 $1,480,000
At a cost of $11, operating income is calculated as 60,000 cords × $11 = $660,000
b) Cutting Assembly
Revenue $540,000 $2,500,000
Cost of services
Incurred $660,000 $360,000
Transferred-in $0 $540,000
Total $660,000 $900,000
Operating income ($120,000) $1,600,000
At a cost of $9, the operating income is 60,000 cords × $9 = $540,000
