Please figure out the net income for the Ryan Company from the following projected accounting balance as of

December 31:

Accounts payable	$60,000		Sales	$900,000
Accounts receivable	120,000		Capital stock	200,000
Depreciation, factory	12,000		Retained earnings	?
Inventories (5/31 & 6/30)	160,000		Cash	80,000
Direct materials used	200,000		Equipment, net	250,000
Office salaries	90,000		Buildings, net	450,000
Insurance, factory	14,000		Utilities, factory	15,000
Plant wages	120,000		Selling expenses	40,000
Bonds payable	140,000		Maintenance, factory	30,000

 

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Jay Company recently acquired an olive oil processing company that has an annual capacity of 1,000,000 liters and

that processed and sold 400,000 liters last year at a market price of $3 per liter. The purpose of the acquisition was to furnish oil for the Cooking Division. The Cooking Division needs 800,000 liters of oil per year. It has been purchasing oil from suppliers at the market price. Production costs at capacity of the olive oil company, now a division, are as follows:

Direct materials per liter	$1.00
Direct processing labor	0.40
Variable processing overhead	0.30
Fixed processing overhead	0.60
Total	$2.30

Management is trying to decide what transfer price to use for sales from the newly acquired company to the Cooking Division. The manager of the Olive Oil Division argues that $3, the market price, is appropriate. The manager of the Cooking Division argues that the cost of $2.30 should be used, or perhaps a lower price, since fixed overhead cost should be recomputed with the larger volume. Any output of the Olive Oil Division not sold to the Cooking Division can be sold to outsiders for $3 per liter.

Compute the operating income for the Olive Oil Division using a transfer price of $3.  This assumes all the 1,000,000 liters sold is at 3.00.

 

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