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Exercise 11-13 (Algo) Transfer Pricing Situations [LO11-3]
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[The following information applies to the questions displayed below.]
In each of the cases below, assume Division X has a product that can be sold either to outside customers or to Division Y of the same company for use in its production process. The managers of the divisions are evaluated based on their divisional profits.
Case | ||
---|---|---|
A | B | |
Division X: | ||
Capacity in units | 100,000 | 95,000 |
Number of units being sold to outside customers | 100,000 | 74,000 |
Selling price per unit to outside customers | $ 55 | $ 30 |
Variable costs per unit | $ 26 | $ 14 |
Fixed costs per unit (based on capacity) | $ 7 | $ 5 |
Division Y: | ||
Number of units needed for production | 21,000 | 21,000 |
Purchase price per unit now being paid to an outside supplier | $ 50 | $ 28 |
Exercise 11-13 (Algo) Part 1
Required:
1. Refer to the data in case A above. Assume in this case that $3 per unit in variable selling costs can be avoided on intracompany sales.
a. What is the lowest acceptable transfer price from the perspective of the selling division?
b. What is the highest acceptable transfer price from the perspective of the buying division?
c. What is the range of acceptable transfer prices (if any) between the two divisions? If the managers are free to negotiate and make decisions on their own, will a transfer probably take place?
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- Exercise 8 (Transfer Pricing Situations) In each of the cases below, assume that Division A has 'a product that can be sold either to outside customers or to Division B of the same company for use in its production process. The managers of the divisions are evaluated based on their divisional profits. Case 1 2 Division X: Capacity in units. Number of units being sold to outside customers.. Selling price per unit to outside customers Variable costs per unit... Fixed costs per unit (based on capacity). 100,000 100,000 P50 P30 100,000 80,000 P35 P20 P 8 Division Y: Number of units needed for production... Purchase price per unit now being paid to an outside supplier.. 20,000 20,000 P47 Р34 Required: 1. Refer to the data in case A above. Assume that P2 per unit in variable selling costs can be avoided on intracompany sales. If the managers are free to negotiate and make decisions on their own, will a transfer take place? If so, within what range will the transfer price fall? Explain. 2.…Exercise 11-13 (Algo) Transfer Pricing Situations [LO11-3] [The following information applies to the questions displayed below.] In each of the cases below, assume Division X has a product that can be sold either to outside customers or to Division Y of the same company for use in its production process. The managers of the divisions are evaluated based on their divisional profits. Case A B Division X: Capacity in units Number of units being sold to outside customers Selling price per unit to outside customers 95,000 95,000 96,000 79,000 $ 50 $ 30 Variable costs per unit Fixed costs per unit (based on capacity) Division Y: $ 28 $ 12 $ 6 $ 4 Number of units needed for production 17,000 17,000 Purchase price per unit now being paid to an outside supplier $ 43 $ 24 Exercise 11-13 (Algo) Part 2 Required: 2. Refer to the data in case B above. In this case, there will be no savings in variable selling costs on intracompany sales. a. What is the lowest acceptable transfer price from the…Exercise 15-34 (Algo) Evaluate Transfer Pricing System: Negotiated Rates (LO 15-2, 3) Tops Corporation is organized into two divisions, Manufacturing and Marketing. Both divisions are considered to be profit centers and the two division managers are evaluated in large part on divisional income. The company makes a single product. It is fabricated in Manufacturing and then packaged and sold in Marketing. There is no intermediate market for the product. The monthly income statements, in thousands of dollars, for the two divisions follow. Production and sales amounted to 15,000 units. Revenues Variable costs Contribution margin Fixed costs Manufacturing $4,500 3,900 $. Marketing $15, 000 6,700 $ 8,300 600 300 800 Divisional profit $. 300 $ 7,500 Assume there is no speclal order pending. Required: a. What transfer price would you recommend for Tops Corporation? b. Using your recommended transfer price, what will be the income of the two divisions, assuming monthly production and sales of…
- Exercise 11-7 (Algo) Transfer Pricing from the Viewpoint of the Entire Company (LO11-3] Division A manufactures electronic circuit boards that can be sold to Division B of the same company or to outside customers. Last year, the following activity occurred in Division A: Selling price per circuit board Variable cost per circuit board Number of circuit boards: Produced during the year Sold to outside customers Sold to Division B $ 189 $ 120 20,300 14,500 5,800 Sales to Division B were at the same price as sales to outside customers. The circuit boards purchased by Division B were used in an electronic instrument manufactured by that division (one board per instrument). Division B incurred $300 in additional variable cost per instrument and then sold the instruments for $690 each. Required: 1. Calculate the net operating incomes earned by Division A, Division B, and the company as a whole. 2. Assume Division A's manufacturing capacity is 20,300 circuit boards. Next year, Division B wants…Problem 15-49 (Algo) Segment Reporting (LO 15-5) Midwest Entertainment has four operating divisions: Bus Charters, Lodging, Concerts, and Ticket Services. Each division is a separate segment for financial reporting purposes. Revenues and costs related to outside transactions were as follows for the past year (dollars in thousands). BUS Charters $11,700 7,950 Ticket Revenues Costs Lodging Concerts Services $4,520 3,360 $5,400 3,550 $1,600 1,500 Bus Charters Division participates in a frequent guest program with Lodging Division. During the past year, Bus Charters reported that it traded lodging award coupons for travel that had a retail value of $1.3 million, assuming that the travel was redeemed at full fares. Concerts Division offered 20 percent discounts to Midwest's bus passengers and lodging guests. These discounts to bus passengers were estimated to have a retail value of $360,000. Midwest's lodging guests redeemed $130,000 in concert discount coupons. Midwest's hotels also…General Transfer Pricing Rule Scottsdale Manufacturing is organized into two divisions:Fabrication and Assembly. Components transferred between the two divisions are recorded at a predetermined transfer price. Standard variable manufacturing cost per unit in the Fabrication Divisionis $500. At the present time, this division is working to capacity. Fabrication estimates that the unitsit produces could be sold on the external market for $650. The product under consideration is viewedas a commodity-type product, with no differentiating features or characteristics.Required1. What roles are played by transfer prices? That is, why are transfer prices needed?2. Use the general transfer pricing rule presented in the chapter to determine an appropriate transfer price.Why is the amount you calculated considered an appropriate transfer price?3. What if the Fabrication Division had excess capacity? How would this change the indicated transferprice? Why is the amount you determined considered an…
- General Transfer Pricing Rule; Goal Congruence American Motors Inc. is divided, for performance evaluation purposes, into several divisions. The Automobile Division of American Motorspurchases most of its transmission systems from another unit of the company. The TransmissionDivision’s incremental cost for manufacturing a standard transmission is approximately $1,350 perunit. This division is currently working at 75% of capacity. The current market price for a standardtransmission is approximately $1,875.Required2. Suppose now that American Motors requires that whenever divisions with excess capacity sell their output internally to other divisions of the company, they must do so at the incremental cost of the supplying (producing) division. Evaluate this transfer pricing rule vis-à-vis each of the following objectives:autonomy, goal congruence, performance evaluation of the divisions, and motivation/incentive effects.3. If the two divisions of American Motors were to negotiate a…Exercise 15-32 (Algo) International Transfer Prices (LO 15-4) San Jose Company operates a Manufacturing Division and an Assembly Division. Both divisions are evaluated as profit centers. Assembly buys components from Manufacturing and assembles them for sale. Manufacturing sells many components to third parties in addition to Assembly. Selected data from the two operations follow. Manufacturing Assembly Capacity (units) 402,000 202,000 Sales pricea $ 404 $ 1,310 Variable costsb $ 170 $ 484 Fixed costs $ 40,020,000 $ 24,020,000 a For Manufacturing, this is the price to third parties. b For Assembly, this does not include the transfer price paid to Manufacturing. Suppose Manufacturing is located in Country A with a tax rate of 70 percent and Assembly in Country B with a tax rate of 30 percent. All other facts remain the same. Required: a. Current production levels in Manufacturing are 202,000 units. Assembly requests an additional…General Transfer Pricing Rule; Goal Congruence American Motors Inc. is divided, for performance evaluation purposes, into several divisions. The Automobile Division of American Motorspurchases most of its transmission systems from another unit of the company. The TransmissionDivision’s incremental cost for manufacturing a standard transmission is approximately $1,350 perunit. This division is currently working at 75% of capacity. The current market price for a standardtransmission is approximately $1,875.Required2. Suppose now that American Motors requires that whenever divisions with excess capacity sell their output internally to other divisions of the company, they must do so at the incremental cost of the supplying (producing) division. Evaluate this transfer pricing rule vis-à-vis each of the following objectives:autonomy, goal congruence, performance evaluation of the divisions, and motivation/incentive effects
- Exercise 15-32 (Algo) International Transfer Prices (LO 15-4) San Jose Company operates a Manufacturing Division and an Assembly Division. Both divisions are evaluated as profit centers. Assembly buys components from Manufacturing and assembles them for sale. Manufacturing sells many components to third parties in addition to Assembly. Selected data from the two operations follow. Manufacturing Assembly Capacity (units) 415,000 215,000 Sales pricea $ 430 $ 1,375 Variable costsb $ 235 $ 510 Fixed costs $ 40,150,000 $ 24,150,000 a For Manufacturing, this is the price to third parties. b For Assembly, this does not include the transfer price paid to Manufacturing. Suppose Manufacturing is located in Country A with a tax rate of 60 percent and Assembly in Country B with a tax rate of 40 percent. All other facts remain the same. Required: a. Current production levels in Manufacturing are 215,000 units. Assembly requests an additional…n each of the cases below, assume that Division X has a product that can be sold either to outside customers or to Division Y of the same company for use in its production process. The managers of the divisions are evaluated based on their divisional profits: Case A B Division X: Capacity in units 140,000 140,000 Number of units being sold to outside customers 140,000 115,000 Selling price per unit to outside customers $ 54 $ 38 Variable costs per unit $ 34 $ 20 Fixed costs per unit (based on capacity) $ 12 $ 10 Division Y: Number of units needed for production 25,000 25,000 Purchase price per unit now being paid to an outside supplier $ 50 $ 37 Required:1-a. Refer to the data in case A above. Assume that $3 per unit in variable selling costs can be avoided on intracompany sales. Determine the transfer price of the selling division. 1-b. If the managers are free to negotiate and make decisions on their own, will…Exercise 11-46 (Algo) Net Realizable Value Method with By-Products (LO 11-3, 5) Denver Fabricators manufactures products DF1 and DF2 from a joint process, which also yields a by-product, BP. The company accounts for the revenues from its by-product sales as other income. Additional information follows: Units produced Allocated joint costa Sales value at split-off DF1 DF2 BP DF1 28,200 ? $ 570,000 Joint Cost DF2 19,200. 2 BP 16,200 2 $ 190,000 $ 103,200 Required: Assuming that joint product costs are allocated using the net realizable value at split-off approach, what joint costs are allocated to each of the joint products DF1 and DF2 and to the by-product, BP? Note: Do not round intermediate calculations. Total 5063,600 $ 561,200 $ 863,200