   Chapter 14, Problem 14.17E

Chapter
Section
Textbook Problem

Transfer pricing Wiring used by the Appliance Division of Kaufman Manufacturing is currently purchased from outside suppliers at a cost of $25 per unit. However, the same materials are available from the Electronic Division. The Electronic Division has unused capacity and can produce the materials needed by the Appliance Division at a variable cost of$20 per unit. a.If a transfer price of $23 per unit is established and 150.000 units of materials are transferred, with no reduction in the Electronic Division's current sales, how much would Kaufman Manufacturing's total operating income increase? b.How much would the Appliance Division's operating income increase? c.How much would the Electronic Division's operating income increase? To determine (a) Concept introduction: In the Transfer Pricing, one unit is transferred from one department to another department. The price of transferred unit is decided through Company's polices. For example: - cost plus margin, fixed price, variable cost etc. To compute: The operating income increased of Kaufman Manufacturing if Department quoted price$23

Explanation

Current purchased price from outside market is $25 Variable cost of electronic division is$20

Total increased in profit will be calculated as:

Increase in operating income=(Market PriceVariable Cost)×

To determine

(b)

Concept introduction:

In the Transfer Pricing, one unit is transferred from one department to another department. The price of transferred unit is decided through Company's polices. For example: - cost plus margin, fixed price, variable cost etc.

To compute:

The operating income increased of appliance division.

To determine

(c)

Concept introduction:

In the Transfer Pricing, one unit is transferred from one department to another department. The price of transferred unit is decided through Company's polices. For example: - cost plus margin, fixed price, variable cost etc.

To compute:

The operating income increased of electronic division.

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