Cost Accounting

2270 Words May 13th, 2013 10 Pages
Transfer Pricing Q

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Des Moines Valley Company

Des Moines Valley Company has two divisions, Computer Services and Management Advisory Services. In addition to their external customers, each division performs work for the other division. The external fees earned by each division in 19x1 were $200,000 for Computer Services and $350,000 for Management Advisory Services. Computer Services worked 3,000 hours for Management Advisory Services, who, in turn, worked 1,200 hours for Computer Services. The total costs of external services performed by Computer Services were $110,000, and $240,000 by Management Advisory Services.
Required:

a Determine the operating income for each division and for the company as a whole if the
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Compute the operating income for the Olive Oil Division using a transfer price of $2.14. What transfer price(s) do you recommend? Compute the operating income for the Olive Oil Division using your recommendation.

Transfer Pricing Q

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Better Food Company a Answer

Sales: External (1,200,000 x $4) Internal (800,000 x $4) Cost of goods sold: Variable (2,000,000 x $1.74) Fixed (2,000,000 x $0.40) Operating income Sales: External (1,200,000 x $4) Internal (800,000 x $2.14) Cost of goods sold: Variable (2,000,000 x $1.74) Fixed (2,000,000 x $0.40) Operating income

$4,800,000 $3,200,000 $3,480,000 $800,000

$8,000,000

$4,280,000 $3,720,000

b

$4,800,000 $1,712,000 $3,480,000 $800,000

$6,512,000

$4,280,000 $2,232,000

c

Due to current demand in excess of the capacity, the Olive Oil Division should not be penalized by having to sell inside. All sales equivalent to the current external

demand of 1,400,000 should be at the market price. Current external demand Current internal demand Total demand Capacity Excess demand Internal demand Noncompetitive internal demand Sales: External (1,200,000 x $4) Internal (200,000 x $4) Internal (600,000 x $2.14) Cost of goods sold: Variable (2,000,000 x $1.74) Fixed (2,000,000 x $0.40) Operating income 1,400,000 800,000 2,200,000 2,000,000 200,000 800,000 600,000 $4,800,000 $800,000 $1,284,000 $3,480,000 $800,000

$6,884,000

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