Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
16th Edition
ISBN: 9780134475585
Author: Srikant M. Datar, Madhav V. Rajan
Publisher: PEARSON
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Textbook Question
Chapter 22, Problem 22.25E
Transfer-pricing problem (continuation of 22-24). Refer to Exercise 22-24. Assume that division A can sell the 1,900 units to other customers at $137 per unit, with variable marketing cost of $2 per unit.
Required
Determine whether Kelly-Elias will benefit if division C purchases the 1,900 units from external suppliers at $115 per unit. Show your computations.
22-24 Transfer-pricing dispute. The Kelly-Elias Corporation, manufacturer of tractors and other heavy farm equipment, is organized along decentralized product lines, with each manufacturing division operating as a separate profit center. Each division manager has been delegated full authority on all decisions involving the sale of that division’s output both to outsiders and to other divisions of Kelly-Elias. Division C has in the past always purchased its requirement of a particular tractor-engine component from division A. However, when informed that division A is increasing its selling price to $135, division C’s manager decides to purchase the engine component from external suppliers.
Division C can purchase the component for $115 per unit in the open market. Division A insists that, because of the recent installation of some highly specialized equipment and the resulting high depreciation charges, it will not be able to earn an adequate return on its investment unless it raises its price. Division A’s manager appeals to top management of Kelly-Elias for support in the dispute with division C and supplies the following operating data:
| C’s annual purchases of the tractor-engine component | 1,900 units |
| A’s variable cost per unit of the tractor-engine component | $ 105 |
| A’s fixed cost per unit of the tractor-engine component | $ 25 |
- A. Assume that there are no alternative uses for internal facilities of division A. Determine whether the company as a whole will benefit if division C purchases the component from external suppliers for $115 per unit. What should the transfer price for the component be set at so that division managers acting in their own divisions’ best interests take actions that are also in the best interest of the company as a whole?
Required
- B. Assume that internal facilities of division A would not otherwise be idle. By not producing the 1,900 units for division C, division A’s equipment and other facilities would be used for other production operations that would result in annual cash-operating savings of $22,800. Should division C purchase from external suppliers? Show your computations.
- C. Assume that there are no alternative uses for division A’s internal facilities and that the price from outsiders drops $15. Should division C purchase from external suppliers? What should the transfer price for the component be set at so that division managers acting in their own divisions’ best interests take actions that are also in the best interest of the company as a whole?
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Chapter 22 Solutions
Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
Ch. 22 - Prob. 22.1QCh. 22 - Describe three criteria you would use to evaluate...Ch. 22 - What is the relationship among motivation, goal...Ch. 22 - Name three benefits and two costs of...Ch. 22 - Organizations typically adopt a consistent...Ch. 22 - Transfer pricing is confined to profit centers. Do...Ch. 22 - What are the three methods for determining...Ch. 22 - What properties should transfer-pricing systems...Ch. 22 - All transfer-pricing methods give the same...Ch. 22 - Prob. 22.10Q
Ch. 22 - Prob. 22.11QCh. 22 - Prob. 22.12QCh. 22 - Prob. 22.13QCh. 22 - Under the general guideline for transfer pricing,...Ch. 22 - How should managers consider income tax issues...Ch. 22 - Evaluating management control systems, balanced...Ch. 22 - Cost centers, profit centers, decentralization,...Ch. 22 - Prob. 22.18ECh. 22 - Prob. 22.19ECh. 22 - Multinational transfer pricing, effect of...Ch. 22 - Prob. 22.21ECh. 22 - Multinational transfer pricing, global tax...Ch. 22 - Prob. 22.23ECh. 22 - Prob. 22.24ECh. 22 - Transfer-pricing problem (continuation of 22-24)....Ch. 22 - Prob. 22.26PCh. 22 - Prob. 22.27PCh. 22 - Effect of alternative transfer-pricing methods on...Ch. 22 - Goal-congruence problems with cost-plus...Ch. 22 - Multinational transfer pricing, global tax...Ch. 22 - Transfer pricing, external market, goal...Ch. 22 - Prob. 22.32PCh. 22 - Transfer pricing, goal congruence, ethics. Cocoa...Ch. 22 - Prob. 22.34PCh. 22 - Transfer pricing, perfect and imperfect markets....Ch. 22 - Prob. 22.36PCh. 22 - Prob. 22.37P
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