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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Decision on transfer pricing

 Materials used by the Instrument Division of T_Kong Industries are currently purchased from outside suppliers at a cost of $175 per unit. However, the same materials are available from the Components Division. The Components Division has unused capacity and can produce the materials needed by the Instrument Division at a variable cost of $122 per unit.

  1. a. If a transfer price of $148 per unit is established and 50,000 units of materials are transferred, with no reduction in the Components Division’s current sales, how much would T_Kong Industries’ total income from operations increase?
  2. b. How much would the Instrument Division’s income from operations increase?
  3. c. How much would the Components Division’s income from operations increase?

a.

To determine

Transfer price: The price charged for the goods and services transferred among the divisions is referred to as transfer price.

Approaches for setting transfer prices:

  • Market price approach
  • Negotiated price approach
  • Cost price approach

To determine: The increase in Industries TK income from operations as a result of transfer pricing

Explanation

Determine the increase in Industries TK’s income from operations as a result of transfer pricing.

Increase in Industries TK’s income from operations} = {(Market price–

b.

To determine
The increase in I Division’s income from operations as a result of transfer pricing

c.

To determine
The increase in C Division’s income from operations as a result of transfer pricing

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