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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

 Garcon Inc. manufactures electronic products, with two operating divisions, the Consumer and Commercial divisions. Condensed divisional income statements, which involve no intracompany transfers and include a breakdown of expenses into variable and fixed components, are as follows:

Garcon Inc.

Divisional Income Statement

For the Year EndedDecember31, 20Y8

 

Consumer

Division

Commercial

Division

Total
Sales:      
14,400 units @ $ 144 per unit $2,073,600   $2,073,600
21,600 units $275 per unit   $5,940,000 5,940,000
  $2,073,600 $5,940,000 $8,013,600
Expenses:      
Variable:      
14,400 units @ $ 104 per unit $ 1,497,600   $1,497,600
21,600 units @ $ 193* per unit   $4,168,800 4,168,800
Fixed 200.000 520,000 720,000
Total expenses $1,697,600 $4,688,800 $6,386,400
Income from operations $ 376,000 $1,251,200 $1,627,200

 *$150 of the $193 per unit represents materials costs, and the remaining $43 per unit represents other variable conversion expenses incurred within the Commercial Division

 The Consumer Division is presently producing 14,400 units out of a total capacity of 17,280 units. Materials used in producing the Commercial Division’s product are currently purchased from outside suppliers at a price of $150 per unit. The Consumer Division is able to produce the materials used by the Commercial Division. Except for the possible transfer of materials between divisions, no changes are expected in sales and expenses.

 Instructions

  1. 1. Would the market price of $150 per unit be an appropriate transfer price for Garcon Inc.? Explain.
  2. 2. If the Commercial Division purchased 2,880 units from the Consumer Division, rather than externally, at a negotiated transfer price of $115 per unit, how much would the income from operations of each division and the total company income from operations increase?
  3. 3. Prepare condensed divisional income statements for Garcon Inc. based on the data in part (2).
  4. 4. If a transfer price of $126 per unit was negotiated, how much would the income from operations of each division and the total company income from operations increase?
  5. 5. a. What is the range of possible negotiated transfer prices that would be acceptable for Garcon Inc.?

 b. Assuming that the managers of the two divisions cannot agree on a transfer price, what price would you suggest as the transfer price?

(1)

To determine

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

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

To indicate: If the market price be the appropriate transfer price for Company G

Explanation

Since the selling or supplying division holds excess capacity, then the buying division could prefer the negotiated price over market price...

(2)

To determine
The increase in CR Division, CL Division, and Company G income from operations as a result of transfer pricing

(3)

To determine

To prepare: The income statements for CR and CL Divisions of Company G for the year ended December 31, 20Y8

(4)

To determine
The increase in CR Division, CL Division, and Company G income from operations as a result of transfer pricing

(5) (a)

To determine
The range of transfer price, if negotiated price approach is used

(b)

To determine

To suggest: The transfer price

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