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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

Transfer pricing

 The materials used by the North Division of Horton Company are currently purchased from outside suppliers at $60 per unit. These same materials are produced by Horton’s South Division. The South Division can produce The materials needed by the North Division at a variable cost of $42 per unit. The division is currently producing 200,000 units and has capacity of 250,000 units. The two divisions have recently negotiated a transfer price of $52 per unit for 30,000 units. By how much will each division's income increase as a result of this transfer?

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 S Division’s and N Division’s income from operations as a result of transfer pricing

Explanation

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

Increase in S Division’s income from operations} = {(Transfer price–Variable cost per unit) × Number of units transferred}($52–$42) × 30,000 units= $300,000

Note: S Division is the supplying division. So, the supplying or selling division negotiates to sell at a price not less than the variable expenses

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