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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

 Exoplex Industries Inc. is a diversified aerospace company, including two operating divisions, Semiconductors and Navigational Systems divisions. Condensed divisional income statements, which involve no intracompany transfers and include a breakdown of expenses into variable and fixed components, are as follows:

 The Semiconductors Division is presently producing 2,240 units out of a total capacity of 2,820 units. Materials used in producing the Navigational Systems Division’s product are currently purchased from outside suppliers at a price of $452 per unit. The Semiconductors Division is able to produce the components used by the Navigational Systems 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 $432 per unit be an appropriate transfer price for Exoplex Industries Inc.? Explain.
  2. 2. If the Navigational Systems Division purchased 580 units from the Semiconductors Division, rather than externally, at a negotiated transfer price of $310 per unit, how much would the income from operations of each division and total company income from operations increase?
  3. 3. Prepare condensed divisional income statements for Exoplex Industries Inc. based on the data in part (2).
  4. 4. If a transfer price of $340 per unit was negotiated, how much would live income from operations of each division and total company income from operations increase?
  5. 5. a. What is the range of possible negotiated transfer prices that would be acceptable for Exoplex Industries 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.

Explanation

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

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 S Division, NS Division, and Company E income from operations as a result of transfer pricing

(3)

To determine

To prepare: The income statements for S and NS Divisions of Company E for the year ended December 31, 20Y8

(4)

To determine
The increase in S Division, NS Division, and Company E 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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