The Spanish Watch Company has two divisions and manufactures one type of watch. The two divisions are the production Division and the Package & Delivery Division. The production Division manufactures watches and then sells them to the Package & Delivery Division, which packs the watches and sells them to retailers. The market price for the Package & Delivery Division to purchase this watch is £40. Production’s cost per watch are: £ Direct materials 6 Direct labour 7 Variable overhead 5 Division fixed cost 2 Package & Delivery’s cost per watch are: £ Direct materials 9 Direct labour 3 Variable overhead 4 Division fixed cost 16 Notes: Fixed costs shown above are per watch for 100,000 units. Required: Calculate and compare the difference in overall corporate net income between Scenario A and Scenario B if the Production Division sells 100,000 watches to retailers for £120 per watch. Scenario A: Negotiated transfer price of £30 per watch between divisions. Scenario B: Market-based transfer price of £40 per watch between divisions. Explain fully.
The Spanish Watch Company has two divisions and manufactures one type of watch. The two divisions are the production Division and the Package & Delivery Division. The production Division manufactures watches and then sells them to the Package & Delivery Division, which packs the watches and sells them to retailers. The market price for the Package & Delivery Division to purchase this watch is £40.
|
Production’s cost per watch are: |
£ |
|
Direct materials |
6 |
|
Direct labour |
7 |
|
Variable overhead |
5 |
|
Division fixed cost |
2 |
|
Package & Delivery’s cost per watch are: |
£ |
|
Direct materials |
9 |
|
Direct labour |
3 |
|
Variable overhead |
4 |
|
Division fixed cost |
16 |
Notes: Fixed costs shown above are per watch for 100,000 units.
Required:
Calculate and compare the difference in overall corporate net income between Scenario A and Scenario B if the Production Division sells 100,000 watches to retailers for £120 per watch.
- Scenario A: Negotiated transfer price of £30 per watch between divisions.
- Scenario B: Market-based transfer price of £40 per watch between divisions.
Explain fully.
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