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 materials6Direct labour7Variable overhead5Division fixed cost2 Package & Delivery’s cost per watch are:£Direct materials9Direct labour3Variable overhead4Division fixed cost16 Notes: Fixed costs shown above are per watch for 100,000 units. Required: a) Assume the transfer price for a watch is 160% of full costs of the Production Division and 100,000 watches are produced and sold to the Package & Delivery Division. What is the Production Division's operating income?

Transfer price is the price that is set internally amongst departments for transferring their goods…

Answered: The Spanish Watch Company has two…

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter10: Decentralization: Responsibility Accounting, Performance Evaluation, And Transfer Pricing

Section: Chapter Questions

Problem 4CE

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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:

a) Assume the transfer price for a watch is 160% of full costs of the Production Division and 100,000 watches are produced and sold to the Package & Delivery Division. What is the Production Division's operating income?

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