Mossfort, Inc., has a division in Canada that makes long-lasting exterior wood stain. Mossfort has another U.S. division, the Retail Division, that operates a chain of home improvement stores. The Retail Division would like to buy the unique, long-lasting wood stain from the Canadian division, since this type of stain is not currently available. The Exterior Stain Division incurs
If the Retail Division purchases the stain from the Canadian division, the shipping costs will be $1.40 per gallon, but sales commissions of $0.75 per gallon will be avoided with an internal transfer. The Retail Division plans to sell the stain for $32.80 per gallon. Normally, the Retail Division earns a gross margin of 35 percent above cost of goods sold.
Required:
- 1. Which Section 482 method should be used to calculate the allowable transfer price?
- 2. Calculate the appropriate transfer price per gallon. (Round to the nearest cent.)
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EBK CORNERSTONES OF COST MANAGEMENT
- The Slate Company manufactures and sells television sets. Its assembly division (AD) buys television screens from the screen division (SD) and assembles the TV sets. The SD, which is operating at capacity, incurs an incremental manufacturing cost of $65 per screen. The SD can sell all its output to the outside market at a price of $100 per screen, after incurring a variable marketing and distribution cost of $8 per screen. If the AD purchases screens from outside suppliers at a price of $100 per screen, it will incur a variable purchasing cost of $7 per screen. Slate’s division managers can act autonomously to maximize their own division’s operating income. Q. Now suppose that the SD can sell only 70% of its output capacity of 20,000 screens per month on the open market. Capacity cannot be reduced in the short run. The AD can assemble and sell more than 20,000 TV sets per month. a. From the point of view of Slate’s management, how much of the SD output should be transferred to the AD?arrow_forwardThe Slate Company manufactures and sells television sets. Its assembly division (AD) buys television screens from the screen division (SD) and assembles the TV sets. The SD, which is operating at capacity, incurs an incremental manufacturing cost of $65 per screen. The SD can sell all its output to the outside market at a price of $100 per screen, after incurring a variable marketing and distribution cost of $8 per screen. If the AD purchases screens from outside suppliers at a price of $100 per screen, it will incur a variable purchasing cost of $7 per screen. Slate’s division managers can act autonomously to maximize their own division’s operating income. Q. What is the maximum transfer price at which the AD manager would be willing to purchase screens from the SD?arrow_forwardThe Slate Company manufactures and sells television sets. Its assembly division (AD) buys television screens from the screen division (SD) and assembles the TV sets. The SD, which is operating at capacity, incurs an incremental manufacturing cost of $65 per screen. The SD can sell all its output to the outside market at a price of $100 per screen, after incurring a variable marketing and distribution cost of $8 per screen. If the AD purchases screens from outside suppliers at a price of $100 per screen, it will incur a variable purchasing cost of $7 per screen. Slate’s division managers can act autonomously to maximize their own division’s operating income. Q. Now suppose that the SD can sell only 70% of its output capacity of 20,000 screens per month on the open market. Capacity cannot be reduced in the short run. The AD can assemble and sell more than 20,000 TV sets per month. a. What is the minimum transfer price at which the SD manager would be willing to sell screens to the AD?arrow_forward
- The Slate Company manufactures and sells television sets. Its assembly division (AD) buys television screens from the screen division (SD) and assembles the TV sets. The SD, which is operating at capacity, incurs an incremental manufacturing cost of $65 per screen. The SD can sell all its output to the outside market at a price of $100 per screen, after incurring a variable marketing and distribution cost of $8 per screen. If the AD purchases screens from outside suppliers at a price of $100 per screen, it will incur a variable purchasing cost of $7 per screen. Slate’s division managers can act autonomously to maximize their own division’s operating income. Q. Now suppose that the SD can sell only 70% of its output capacity of 20,000 screens per month on the open market. Capacity cannot be reduced in the short run. The AD can assemble and sell more than 20,000 TV sets per month. a. If Slate mandates the SD and AD managers to “split the difference” on the minimum and maximum transfer…arrow_forwardSony manufactures and sells television sets. Its assembly division (AD) buys television screens from the screen division (SD) and assembles the TV sets. The SD, which is operating at capacity, incurs an incremental manufacturing cost of $60 per screen. The SD can sell all its output to the outside market at a price of $110 per screen, after incurring a variable marketing and distribution cost of $10 per screen. If the AD purchases screens from outside suppliers at a price of $110 per screen, it will incur a variable purchasing cost of $8 per screen. Sony’s division managers can act autonomously to maximize their own division’s operating income. Required: What is the minimum transfer price at which the SD manager would be willing to sell screens to the AD? What is the maximum transfer price at which the AD manager would be willing to purchase screens from the SD? Now suppose that the SD can sell only 80% of its output capacity of 10,000 screens per month on the open market.…arrow_forwardDiversified Industries manufactures sump-pumps. Its most popular product is called the Super Soaker, which has a retail price of $1,200 and costs $540 to manufacture. It sells the Super Soaker on a standalone basis directly to businesses. Diversified also provides installation services for these commercial customers, who want an emergency pumping capability (with regular and back-up generator power) at their businesses. Diversified also distributes the Super Soaker through a consignment agreement with Menards. Income data for the first quarter of 2017 from operations other than the Super Soaker are as follows. Revenues $9,500,000 Expenses 7,750,000 Diversified has the following information related to two Super Soaker revenue arrangements during the first quarter of 2017.1. Diversified sells 30 Super Soakers to businesses in flood-prone areas for a total contract price of $54,600. In addition to the pumps, Diversified also provides installation (at a cost of $150 per pump). On a…arrow_forward
- Gregg Manufacturing has one plant located in Belgium and another plant located in the United States. The Belgium plant manufactures a component used in a finished product manufactured at the U.S. plant. Currently, the Belgium plant is operating at 70 per cent capacity. In Belgium, the income tax rate is 30 per cent; in the United States, the corporate income tax rate is 35 per cent. The market price of the component is £280 and the Belgium plant's costs to manufacture the component are as follows: Direct materials £30Direct labour 50Variable overhead 12Fixed overhead 56 Refer to Figure 20-10. What is the minimum transfer price that the Belgium division would be willing to accept? Group of answer choices £280 £148 £136 £92arrow_forwardLobby Company produces and sells its only product XT-300. The company has been approached by a new customer from the USA with an offer to purchase 15,000 units of XT-300 for $11.50 each. Selling to the US will not affect the company’s other customers, and existing sales would not be affected. Lobby normally produces 110,000 units per year but only plans to produce and sell 90,000 in the coming year. Exporting the product to the USA will require a further packaging cost of $0.30 per unit. The normal sales price is $16 per unit. Unit cost information for the normal level of activity is as follows: Direct materials $4.50 Direct labour 4.20 Variable overhead 1.65 Fixed overhead 2.00 Total $12.35 Required: A). What are the relevant costs and benefits of this special order? B). Will operating income increase or decrease if the order from this new customer is accepted – if so, by how much? C). Suppose the new customer wants to buy 25,000 units, should…arrow_forwardLobby Company produces and sells its only product XT-300. The company has been approached by a new customer from the USA with an offer to purchase 15,000 units of XT-300 for $11.50 each. Selling to the US will not affect the company’s other customers, and existing sales would not be affected. Lobby normally produces 110,000 units per year but only plans to produce and sell 90,000 in the coming year. Exporting the product to the USA will require a further packaging cost of $0.30 per unit. The normal sales price is $16 per unit. Unit cost information for the normal level of activity is as follows: Direct materials $4.50 Direct labour 4.20 Variable overhead 1.65 Fixed overhead 2.00 Total $12.35 Required: C). Suppose the new customer wants to buy 25,000 units, should Lobby accept the offer? Show with calculations the effect on net incomearrow_forward
- Lobby Company produces and sells its only product XT-300. The company has been approached by a new customer from the USA with an offer to purchase 15,000 units of XT-300 for $11.50 each. Selling to the US will not affect the company’s other customers, and existing sales would not be affected. Lobby normally produces 110,000 units per year but only plans to produce and sell 90,000 in the coming year. Exporting the product to the USA will require a further packaging cost of $0.30 per unit. The normal sales price is $16 per unit. Unit cost information for the normal level of activity is as follows: Direct materials $4.50 Direct labour 4.20 Variable overhead 1.65 Fixed overhead 2.00 Total $12.35 Required: A). What are the relevant costs and benefits of this special order? B). Will operating income increase or decrease if the order from this new customer is accepted – if so, by how much?arrow_forwardUse the following information for Exercises 10 through 12: Babcock Company manufactures fast-baking ovens in the United States at a production cost of $500 per unit and sells them to uncontrolled distributors in the United States and a wholly-owned sales subsidiary in Canada. Babcock's U.S. distributors sell the ovens to restaurants at a price of $1,000, and its Canadian subsidiary sells the ovens at a price of $1,100. Other distributors of ovens to restaurants in Canada normally earn a gross profit equal to 25 percent of selling price. Babcock's main competitor in the United States sells fast-baking ovens at an average 50 percent markup on cost. Babcock's Canadian sales subsidiary incurs operating costs, other than cost of goods sold, that average $250 per oven sold. The average operating profit margin earned by Canadian distributors of fast-baking ovens is 5 percent.arrow_forwardConner Manufacturing has one plant located in Italy and another plant located in the United States. The Italian plant manufactures a component used in a finished product manufactured at the U.S. plant. Currently, the Italian plant is operating at 75 per cent capacity. In Italy, the income tax rate is 32 per cent; in the United States, the corporate income tax rate is 35 per cent. The market price of the component is £240 and the Italian plant's costs to manufacture the component are as follows: Direct materials £60Direct labour 40Variable overhead 20Fixed overhead 30 Which transfer price would be in the best interest of the overall company? Group of answer choices £240 £100 £150 £120arrow_forward
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning