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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. Would the market price of $150 per unit be an appropriate transfer price for Garcon Inc.? Explain. 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. Prepare condensed divisional income statements for Garcon Inc. based on the data in part (2). 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. 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?

BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Solutions

Chapter
Section
Chapter 24, Problem 24.6APR
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?

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Chapter 24 Solutions

Accounting
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Ch. 24 - Budgetary performance for cost center Caroline...Ch. 24 - Budgetary performance for cost center Conley...Ch. 24 - Service department charges The centralized...Ch. 24 - Service department charges The centralized...Ch. 24 - Income from operations for profit center Using the...Ch. 24 - Income from operations for profit center Using the...Ch. 24 - Profit margin, investment turnover, and ROI Cash...Ch. 24 - Profit margin, investment turnover and ROI Briggs...Ch. 24 - Residual income The Consumer Division of Galena...Ch. 24 - Residual income The Commercial Division of Herring...Ch. 24 - Transfer pricing The materials used by the North...Ch. 24 - Transfer pricing The materials used by the...Ch. 24 - Budget performance reports for cost centers...Ch. 24 - Divisional income statements The following data...Ch. 24 - Service department charges and activity bases For...Ch. 24 - Activity bases for service department charges For...Ch. 24 - Service department charges In divisional income...Ch. 24 - Service department charges and activity bases...Ch. 24 - Divisional income statements with service...Ch. 24 - Corrections to service department charges for a...Ch. 24 - Profit center responsibility reporting Glades...Ch. 24 - Return on investment The income from operations...Ch. 24 - Residual income Based on the data in Exercise...Ch. 24 - Determining missing items in return computation...Ch. 24 - Profit margin, investment turnover, and return on...Ch. 24 - Return on investment The Walt Disney Company has...Ch. 24 - Determining missing items in return and residual...Ch. 24 - Determining missing items from computations Data...Ch. 24 - Return on investment, residual income for a...Ch. 24 - Balanced scorecard for a service company American...Ch. 24 - Building a balanced scorecard Hit-n-Kun Inc. owns...Ch. 24 - Decision on transfer pricing Materials used by the...Ch. 24 - Decision on transfer pricing Based on T_Kong...Ch. 24 - Budget performance report for a cost center...Ch. 24 - Profit center responsibility reporting for a...Ch. 24 - Divisional income statements and return on...Ch. 24 - Effect of proposals on divisional performance A...Ch. 24 - Divisional performance analysis and evaluation The...Ch. 24 - Transfer pricing Garcon Inc. manufactures...Ch. 24 - Budget performance report for a cost center The...Ch. 24 - Profit center responsibility reporting for a...Ch. 24 - Divisional income statements and return on...Ch. 24 - Effect of proposals on divisional performance A...Ch. 24 - Divisional performance analysis and evaluation The...Ch. 24 - Transfer pricing Exoplex Industries Inc. is a...Ch. 24 - Ethics in Action Sembotix Company has several...Ch. 24 - Communication The Norsk Division of Gridiron...Ch. 24 - Service department charges The Customer Service...Ch. 24 - Evaluating divisional performance The three...Ch. 24 - Evaluating division performance Last Resort...

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