Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
16th Edition
ISBN: 9780134475585
Author: Srikant M. Datar, Madhav V. Rajan
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Textbook Question
Chapter 22, Problem 22.28P
Effect of alternative transfer-pricing methods on division operating income. Cran Health Products is a cranberry cooperative that operates two divisions, a harvesting division and a processing division. Currently, all of harvesting’s output is converted into cranberry juice by the processing division, and the juice is sold to large beverage companies that produce cranberry juice blends. The processing division has a yield of 500 gallons of juice per 1,000 pounds of cranberries. Cost and market price data for the two divisions are as follows:
- A. Compute Cran Health’s operating income from harvesting 480,000 pounds of cranberries during June 2017 and processing them into juice.
- B. Cran Health rewards its division managers with a bonus equal to 6% of operating income. Compute the bonus earned by each division manager in June 2017 for each of the following transfer-pricing methods:
- a. 225% of full cost
- b. Market price
- C. Which transfer-pricing method will each division manager prefer? How might Cran Health resolve any conflicts that may arise on the issue of transfer pricing?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
Determining transfer pricing
The Harris Company is decentralized, and divisions are considered investment centers. Harris has one division that manufactures oak dining room chairs with upholstered seat cushions. The Chair Division cuts, assembles, and finishes the oak chairs and then purchases and attaches the seat cushions. The Chair Division currently purchases the cushions for $22 from an outside vendor. The Cushion Division manufactures upholstered seat cushions that are sold to customers outside the company. The Chair Division currently sells 800 chairs per quarter, and the Cushion Division is operating at capacity, which is 800 cushions per quarter. The two divisions report the following information:
Requirements
Determine the total contribution margin for Harris Company for the quarter.
Assume the Chair Division purchases the 800 cushions needed from the Cushion Division at its current sales price. What is the total contribution margin for each division and the company?
Assume…
Cran Health Products is a cranberry cooperative that operates two divisions, a harvesting division and a processing division. Currently, all of harvesting’s output is converted into cranberry juice by the processing division, and the juice is sold to large beverage companies that produce cranberry juice blends. The processing division has a yield of 500 gallons of juice per 1,000 pounds of cranberries. Cost and market price data for the two divisions are as follows:
Q.Compute Cran Health’s operating income from harvesting 480,000 pounds of cranberries during June 2017 and processing them into juice.
Cran Health Products is a cranberry cooperative that operates two divisions, a harvesting division and a processing division. Currently, all of harvesting’s output is converted into cranberry juice by the processing division, and the juice is sold to large beverage companies that produce cranberry juice blends. The processing division has a yield of 500 gallons of juice per 1,000 pounds of cranberries. Cost and market price data for the two divisions are as follows:
Assume that Pat Borges, CEO of Cran Health, had mandated a transfer price equal to 225% of full cost. Now he decides to decentralize some management decisions and sends around a memo that states the following: “Effective immediately, each division of Cran Health is free to make its own decisions regarding the purchase of direct materials and the sale of finished products.”
Q. Borges feels that a dual transfer-pricing policy will improve goal congruence. He suggests that transfers out of the harvesting division be made at…
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
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- The Harris Company is decentralized, and divisions are considered investment centers. Harris has one division that manufactures oak dining room chairs with upholstered seat cushions. The Chair Division cuts, assembles, and finishes the oak chairs and then purchases and attaches the seat cushions. requirements 2. Assume the Chair Division purchases the 800 cushions needed from the Cushion Division at its current sales price. What is the total contribution margin for each division and the company? 3. Assume the Chair Division purchases the 800 cushions needed from the Cushion Division at its current variable cost. What is the total contribution margin for each division and the company? 5. Assume the Cushion Division has capacity of 1,600 cushions per quarter and can continue to supply its outside customers with 800 cushions per quarter and also supply the Chair Division with 800 cushions per quarter. What transfer price should Harris Company set? Explain your reasoning. Using the…arrow_forwardHealth Products is a cranberry cooperative that operates two divisions, a harvesting division and a processing division. Currently, all of harvesting's output is converted into cranberry juice by the processing division, and the juice is sold to large beverage companies that produce cranberry juice blends. The processing division has a produce of 500 gallons of juice per 1,000 pounds of cranberries. Cost and market price data for the two divisions are as follows: Harvesting Division Processing Division Variable cost per pound of cranberries $0.10 Variable cost per gallon of juice produced $0.18 Fixed cost per pound of cranberries $0.30 Fixed cost per gallon of juice produced $0.35 Selling price per pound of cranberries in $0.68 Selling price per gallon of juice outside market $2.45 If processing division purchases cranberries from outside supplier, the price will be $0.15 per pound. Required: 1. What is the minimum transfer price at which the harvesting division willing to accept to…arrow_forwardDetermining transfer pricing The Hernandez Company is decentralized, and divisions are considered investment centers. Hernandez has one division that manufactures oak dining room chairs with upholstered seat cushions. The Chair Division cuts, assembles, and finishes the oak chairs and then purchases and attaches the seat cushions. The Chair Division currently purchases the cushions for $32 from an outside vendor. The Cushion Division manufactures upholstered seat cushions that are sold to customers outside the company. The Chair Division currently sells 1,800 chairs per quarter, and the Cushion Division is operating at capacity, which is 1,800 cushions per quarter. The two divisions report the following information: Requirements Determine the total contribution margin for Hernandez Company for the quarter. Assume the Chair Division purchases the 1,800 cushions needed from the Cushion Division at its current sales price. What is the total contribution margin for each division and the…arrow_forward
- Quest Motors, Inc., operates as a decentralized multidivision company. The Vivo division of Quest Motors purchases most of its airbags from the airbag division. The airbag division’s incremental cost for manufacturing the airbags is $90 per unit. The airbag division is currently working at 80% of capacity. The current market price of the airbags is $125 per unit. Q. If the two divisions were to negotiate a transfer price, what is the range of possible transfer prices? Evaluate this negotiated transfer-pricing policy using the criteria of goal congruence, evaluating division performance, motivating management effort, and preserving division autonomy.arrow_forwardSunland Inc. manufactures wood poles. Sunland Inc. has two responsibility centres, harvesting and sawing, which are both evaluated as profit centres. The harvesting division does all the harvesting operations and transfers logs to the sawing division, which converts the wood into poles for external clients. When operating at full capacity, the sawing division can convert 13,800 poles. Management is considering replacing this type of wood pole with another type of wood pole that can be sold at a lower price and could allow the firm to operate at full capacity all the time. The director of the sawing division suggested that the maximum price the division can pay for each log from harvesting is $30.80. Following is the information that supports this suggestion: Price per pole that the client would pay Direct labour costs Variable overhead costs Fixed overhead costs Raw material costs (other than logs) Profit margin Total costs and profit margin Maximum price for a log $35.00 4.10 8.70…arrow_forwardThe Windshield division of Jaguar Company makes windshields for use in its Assembly division. The Windshield division incurs variable costs of $208 per windshield and has capacity to make 670,000 windshields per year. The market price is $530 per windshield. The Windshield division incurs total fixed costs of $4,000,000 per year. If the Windshield division has excess capacity, what is the range of possible transfer prices that could be used on transfers between the Windshield and Assembly divisions? Transfer price per windshield will be at least but not more thanarrow_forward
- The Windshield division of Fast Car Co. makes windshields for use in Fast Car’s Assembly division. The Windshield division incurs variable costs of $240 per windshield and has capacity to make 630,000 windshields per year. The market price is $475 per windshield. The Windshield division incurs total fixed costs of $3,050,000 per year. If the Windshield division is operating at full capacity, what transfer price should be used on transfers between the Windshield and Assembly divisions? he Windshield division of Fast Car Co. makes windshields for use in Fast Car’s Assembly division. The Windshield division incurs variable costs of $240 per windshield and has capacity to make 630,000 windshields per year. The market price is $475 per windshield. The Windshield division incurs total fixed costs of $3,050,000 per year.If the Windshield division is operating at full capacity, what transfer price should be used on transfers between the Windshield and Assembly divisions?…arrow_forwardThe Windshield division of Fast Car Co. makes windshields for use in Fast Car’s Assembly division. The Windshield division incurs variable costs of $200 per windshield and has capacity to make 500,000 windshields per year. The market price is $450 per windshield. The Windshield division incurs total fixed costs of $3,000,000 per year. If the Windshield division is operating at full capacity, what transfer price should be used on transfers between the Windshield and Assembly divisions?arrow_forwardCalculating Transfer PriceBurt Inc. has a number of divisions, including the Indian Division, a producer of liquid pumps,and Maple Division, a manufacturer of boat engines.Indian Division produces the h20-model pump that can be used by Maple Division in theproduction of motors that regulate the raising and lowering of the boat engine’s stern drive unit.The market price of the h20-model is $720, and the full cost of the h20-model is $540.Required:1. If Burt has a transfer pricing policy that requires transfer at full cost, what will the transferprice be? Do you suppose that Indian and Maple divisions will choose to transfer at thatprice? 2. If Burt has a transfer pricing policy that requires transfer at market price, what wouldthe transfer price be? Do you suppose that Indian and Maple divisions would choose totransfer at that price?3. Now suppose that Burt allows negotiated transfer pricing and that Indian Divisioncan avoid $120 of selling expense by selling to Maple Division. Which…arrow_forward
- The Conti Company is decentralized, and divisions are considered investment contors. Con has one division that manufactures oak dining room chairs with upholstered seat cushions. The Chair Division cuts, assembles, and finishes the cak chairs and then purchases and attaches the seat cushions (Click the icon to view additional information) Read the requirements Requirement 3. Assume the Chair Division purchases the 900 cushions needed from the Cushion Division at its current variable cost. What is the total contribution margin for each division and the company? (Enter "0" for any zero amounts) Number of units Contribution margin per unt Total contribution margin Cushion Division Total Requirement 4. Review your answers for Requirements 1, 2, and 3. What is the best option for Con Company? The best option for Cois in total contribution margin than if the duson purchanchons inveraly By having the Chair Division purchase the cushions from a in outside vendor, the company would get…arrow_forwardPorter Division is part of the Hurry Group. It produces a machine spare part at a cost of $20 which is then transferred to Hermy Division within the group which has additional costs of $10. Hermy Division sells externally at $32. The spare part is also produced in other divisions within the Hurry Group and a limited quantity can be purchased from outside the group. Hurry Group has a policy of transfer price at cost plus 20%. REQUIRED:a) Determine profit of each division and overall profit of Hurry Group.arrow_forwardCleene Division of Soaphen Corporation produces soap, 20% of which are sold to Bubbly Division of Soaphen Corporation. The remainder is sold to outside customers. Soaphen treats its divisions as profit centers and allows division managers to choose their sources of sale and supply. Corporate policy requires that all interdivisional sales and purchases be recorded at variable cost at transfer price. Cleene Division’s estimated sales and standard cost data for the year ending December 31, 2000, based on capacity of 100,000 units are as follows: BUBBLY OUTSIDERS Sales 900,000 8,000,000 Variable Costs (900,000) (3,600,000) Fixed costs (300,000) (1,200,000) Gross Margin (300,000) (320,000) Unit Sales 20,000 80,000 Cleene has an opportunity to sell the 20,000 units shown above to an outside customer at a price of P75 per unit. Bubbly can purchase its requirements from an outside supplier at a price of P85 per unit.…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage LearningCornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningFinancial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,
- Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College Pub
Managerial Accounting: The Cornerstone of Busines...
Accounting
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Cengage Learning
Cornerstones of Cost Management (Cornerstones Ser...
Accounting
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Cengage Learning
Financial And Managerial Accounting
Accounting
ISBN:9781337902663
Author:WARREN, Carl S.
Publisher:Cengage Learning,
Managerial Accounting
Accounting
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:South-Western College Pub
HR Basics: Compensation; Author: HR Basics: Compensation;https://www.youtube.com/watch?v=wZoRId6ADuo;License: Standard Youtube License