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Sugarland, Inc., has a division in Indonesia that makes dyestuff in a variety of colors used to dye denim for jeans, and another division in the United States that manufactures denim clothing. The Dyestuff Division incurs manufacturing costs of $2.68 for one pound of powdered dye. The Clothing Division currently buys its dye powder from an outside supplier for $3.80 per pound. If the Clothing Division purchases the powder from the Indonesian division, the shipping costs will be $0.34 per pound, but sales commissions of $0.05 per pound will be avoided with an internal transfer. Required: 1. Which Section 482 method should be used to calculate the allowable transfer price? Calculate the appropriate transfer price per pound. 2. Assume that the Clothing Division cannot buy this type of powder externally since it has an unusual formula that results in a color particular to Sugarland’s jeans. Which Section 482 method should be used to calculate the allowable transfer price? Calculate the appropriate transfer price per pound.

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Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

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Chapter
Section
BuyFindarrow_forward

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
Chapter 10, Problem 14E
Textbook Problem
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Sugarland, Inc., has a division in Indonesia that makes dyestuff in a variety of colors used to dye denim for jeans, and another division in the United States that manufactures denim clothing. The Dyestuff Division incurs manufacturing costs of $2.68 for one pound of powdered dye.

The Clothing Division currently buys its dye powder from an outside supplier for $3.80 per pound. If the Clothing Division purchases the powder from the Indonesian division, the shipping costs will be $0.34 per pound, but sales commissions of $0.05 per pound will be avoided with an internal transfer.

Required:

  1. 1. Which Section 482 method should be used to calculate the allowable transfer price? Calculate the appropriate transfer price per pound.
  2. 2. Assume that the Clothing Division cannot buy this type of powder externally since it has an unusual formula that results in a color particular to Sugarland’s jeans. Which Section 482 method should be used to calculate the allowable transfer price? Calculate the appropriate transfer price per pound.

1.

To determine

Identify the Section 482 method that should be used to calculate the allowable transfer price and calculate the transfer price using the appropriate section 482 method.

Explanation of Solution

Transfer price: It is a price charged on the goods manufactured by the one division and transferred to another division.

Identify the Section 482 method that should be used to calculate the allowable transfer price:

As the market price is given, the comparable uncontrolled price method should be used to calculate the allowable transfer price.

Calculate the transfer price:

...

2.

To determine

Identify the Section 482 method that should be used to calculate the allowable transfer price for the given situation and calculate the transfer price using the appropriate section 482 method.

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Chapter 10 Solutions

Cornerstones of Cost Management (Cornerstones Series)
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