HORNGRENS COST ACCOUNTING W/ACCESS
16th Edition
ISBN: 9781323687604
Author: Datar
Publisher: PEARSON
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Textbook Question
Chapter 22, Problem 22.25E
Transfer-pricing problem (continuation of 22-24). Refer to Exercise 22-24. Assume that division A can sell the 1,900 units to other customers at $137 per unit, with variable marketing cost of $2 per unit.
Required
Determine whether Kelly-Elias will benefit if division C purchases the 1,900 units from external suppliers at $115 per unit. Show your computations.
22-24 Transfer-pricing dispute. The Kelly-Elias Corporation, manufacturer of tractors and other heavy farm equipment, is organized along decentralized product lines, with each manufacturing division operating as a separate profit center. Each division manager has been delegated full authority on all decisions involving the sale of that division’s output both to outsiders and to other divisions of Kelly-Elias. Division C has in the past always purchased its requirement of a particular tractor-engine component from division A. However, when informed that division A is increasing its selling price to $135, division C’s manager decides to purchase the engine component from external suppliers.
Division C can purchase the component for $115 per unit in the open market. Division A insists that, because of the recent installation of some highly specialized equipment and the resulting high
| C’s annual purchases of the tractor-engine component | 1,900 units |
| A’s variable cost per unit of the tractor-engine component | $ 105 |
| A’s fixed cost per unit of the tractor-engine component | $ 25 |
- A. Assume that there are no alternative uses for internal facilities of division A. Determine whether the company as a whole will benefit if division C purchases the component from external suppliers for $115 per unit. What should the transfer price for the component be set at so that division managers acting in their own divisions’ best interests take actions that are also in the best interest of the company as a whole?
Required
- B. Assume that internal facilities of division A would not otherwise be idle. By not producing the 1,900 units for division C, division A’s equipment and other facilities would be used for other production operations that would result in annual cash-operating savings of $22,800. Should division C purchase from external suppliers? Show your computations.
- C. Assume that there are no alternative uses for division A’s internal facilities and that the price from outsiders drops $15. Should division C purchase from external suppliers? What should the transfer price for the component be set at so that division managers acting in their own divisions’ best interests take actions that are also in the best interest of the company as a whole?
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Quest Motors, Inc., operates as a decentralized multidivision company. The Vivo division of Quest Motors purchases most of its airbags from the airbag division. The airbag division’s incremental cost for manufacturing the airbags is $90 per unit. The airbag division is currently working at 80% of capacity. The current market price of the airbags is $125 per unit.
Q. Instead of allowing negotiation, suppose that Quest specifies a hybrid transfer price that “splits the difference” between the minimum and maximum prices from the divisions’ standpoint. What would be the resulting transfer price for airbags?
Spark Ltd has two divisions, assembly and electrical. The assembly division transfers partiallycompleted components to the electrical division at a predetermined transfer price. The assemblydivision’s standard variable production cost per unit is $550. This division has spare capacity, and itcould sell all its components to outside buyers at $680 per unit in a perfectly competitive market.
Explain how negotiation between the supplying and buying units may be used to set transferprices. How does this relate to the general transfer pricing rule?
McKenna's Florida Division is currently purchasing a part from an outside supplier. The company's Alabama Division, which has excess capacity, makes and sells this part for external customers at a variable cost of $22 and a selling price of $34. If Alabama begins sales to Florida, it (1) will use the general transfer-pricing rule and (2) will be able to reduce variable cost on internal transfers by $4. If sales to outsiders will not be affected, Alabama would establish a transfer price of:
Chapter 22 Solutions
HORNGRENS COST ACCOUNTING W/ACCESS
Ch. 22 - Prob. 22.1QCh. 22 - Describe three criteria you would use to evaluate...Ch. 22 - What is the relationship among motivation, goal...Ch. 22 - Name three benefits and two costs of...Ch. 22 - Organizations typically adopt a consistent...Ch. 22 - Transfer pricing is confined to profit centers. Do...Ch. 22 - What are the three methods for determining...Ch. 22 - What properties should transfer-pricing systems...Ch. 22 - All transfer-pricing methods give the same...Ch. 22 - Prob. 22.10Q
Ch. 22 - Prob. 22.11QCh. 22 - Prob. 22.12QCh. 22 - Prob. 22.13QCh. 22 - Under the general guideline for transfer pricing,...Ch. 22 - How should managers consider income tax issues...Ch. 22 - Evaluating management control systems, balanced...Ch. 22 - Cost centers, profit centers, decentralization,...Ch. 22 - Prob. 22.18ECh. 22 - Prob. 22.19ECh. 22 - Multinational transfer pricing, effect of...Ch. 22 - Prob. 22.21ECh. 22 - Multinational transfer pricing, global tax...Ch. 22 - Prob. 22.23ECh. 22 - Prob. 22.24ECh. 22 - Transfer-pricing problem (continuation of 22-24)....Ch. 22 - Prob. 22.26PCh. 22 - Prob. 22.27PCh. 22 - Effect of alternative transfer-pricing methods on...Ch. 22 - Goal-congruence problems with cost-plus...Ch. 22 - Multinational transfer pricing, global tax...Ch. 22 - Transfer pricing, external market, goal...Ch. 22 - Prob. 22.32PCh. 22 - Transfer pricing, goal congruence, ethics. Cocoa...Ch. 22 - Prob. 22.34PCh. 22 - Transfer pricing, perfect and imperfect markets....Ch. 22 - Prob. 22.36PCh. 22 - Prob. 22.37P
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- Management of Great Springs Bottled Water Company has asked you, the controller, to develop a transfer pricing system for the company. The Transportation Department of the company sells all of its product to the Bottling Department of the company. Thus the Transportation Departments sales become the Bottling Departments cost of goods sold. In order to determine an optimal transfer pricing system, management would like you to demonstrate what an income statement would look like under a cost, market, and negotiated transfer pricing structure. These various transfer prices are listed as follows. Prepare an income statement for each of the transfer prices by filling in the missing numbers in the provided income statement based on each transfer price (thus four different income statements) and calculate the operating income/loss percentage. Prepare a brief summary of the results.arrow_forwardGreen Auto's Northern Division is currently purchasing a part from an outside supplier. The company's Southern Division, which has no excess capacity, makes and sells this part for external customers at a variable cost of $19 and a selling price of $31. If Southern begins sales to Northern, it (1) will use the general transfer-pricing rule and (2) will be able to reduce variable cost on internal transfers by $3. On the basis of this information, Southern would establish a transfer price of: $16. $19. $28. $31. None of the other answers are correct.arrow_forwardQuest Motors, Inc., operates as a decentralized multidivision company. The Vivo division of Quest Motors purchases most of its airbags from the airbag division. The airbag division’s incremental cost for manufacturing the airbags is $90 per unit. The airbag division is currently working at 80% of capacity. The current market price of the airbags is $125 per unit. Q. If the two divisions were to negotiate a transfer price, what is the range of possible transfer prices? Evaluate this negotiated transfer-pricing policy using the criteria of goal congruence, evaluating division performance, motivating management effort, and preserving division autonomy.arrow_forward
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