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Clanahan, Inc., has a number of divisions around the world. Division US (in the United States) purchases a component from Division N (in the Netherlands). The component can be purchased externally for $24.50 each. The freight and insurance on the item amount to $2.45; however, commissions of $2.00 need not be paid. Required: 1. Calculate the transfer price using the comparable uncontrolled price method. 2. Suppose that there is no outside market for the component that Division N transfers to Division US. Further assume that Division US sells the component for $26.00 and normally receives a 30 percent markup on cost of goods sold. Calculate the transfer price using the resale price method. 3. Now assume that there is no external market for the component transferred from Division N to Division US, and that the component is used in the manufacture of another product (i.e., it is not resold). Calculate the transfer price using the cost-plus method. Further assume that Division N’s manufacturing cost for the component is $18.20. 4. What if commissions avoided were $2.25 per unit? How would that affect the comparable uncontrolled price? The resale price? The cost-plus price?

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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 6CE
Textbook Problem
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Clanahan, Inc., has a number of divisions around the world. Division US (in the United States) purchases a component from Division N (in the Netherlands). The component can be purchased externally for $24.50 each. The freight and insurance on the item amount to $2.45; however, commissions of $2.00 need not be paid.

Required:

  1. 1. Calculate the transfer price using the comparable uncontrolled price method.
  2. 2. Suppose that there is no outside market for the component that Division N transfers to Division US. Further assume that Division US sells the component for $26.00 and normally receives a 30 percent markup on cost of goods sold. Calculate the transfer price using the resale price method.
  3. 3. Now assume that there is no external market for the component transferred from Division N to Division US, and that the component is used in the manufacture of another product (i.e., it is not resold). Calculate the transfer price using the cost-plus method. Further assume that Division N’s manufacturing cost for the component is $18.20.
  4. 4. What if commissions avoided were $2.25 per unit? How would that affect the comparable uncontrolled price? The resale price? The cost-plus price?

1.

To determine

Calculate the transfer price by using comparable uncontrolled price method.

Explanation of Solution

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

Comparable uncontrolled price method: This method considers the market price as the transfer price.

Calculate the transfer price by using comparable uncontrolled price method:

ParticularsAmount ($)
Market price$24...

2.

To determine

Calculate the transfer price by using the resale pricing method.

3.

To determine

Calculate the transfer price by using the cost plus method.

4.

To determine

Explain the manner that the increase in the avoidable commission ($2.00 to $2.45), the effect on comparable uncontrolled price, resale price, and cost plus price.

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Chapter 10 Solutions

Cornerstones of Cost Management (Cornerstones Series)
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