Question

APPLY THE CONCEPTS: Determining benefits of negotiated transfer price Assume that Selling Division and Buying Division are both owned by Overall Corporation. Selling Division sells a product that is used by Buying Division and outside customers. Selling Division has 22,000 units of excess capacity. Selling Division currently sells the product for $80 per unit and Buying Division currently buys 22,000 units of the product from an outside source for $80 per unit. Variable costs of the product are $16, of which $4 is the cost of selling the product to an outside customer. 76 < transfer Using Selling price less avoidable costs as the minimum price, fill in the following formula for the desired transfer price: $ price < $ < transfer price < $ Using Variable costs as the minimum price, fill in the following formula for the desired transfer price: $ 12 X Assume there are no avoidable costs with an internal sale (variable costs equal $16) and that Buying Division buys 22,000 units from Selling Division. Complete the table for each transfer price: Transfer Price Transfer Price $75 $23 Increase in net income of Selling Division Increase in net income of Buying Division Increase in net income of Overall Corporation

Answer 1

Please find below table useful to compute desired results: -

B Particulars Given 22000 80 1 2 Excess Capacity 3 Selling price 4 Variable costs 5 Selling cost 6 Transfer Price 7523 7 8 Using Selling price less avoidable costs 9 Using Variable costs 1=B3-B5 =B4-B5 <transfer price =B3 <transfer price> =B3 10 11 Increase in net income of Selling Division =B2*(B6-B4) =B2*(C6-B4) 12 Increase in net income of Buying Division =B2*(B3-B6) =B2*(B3-C6) 13 Increase in net income of Overall Corporation =B11+B12 =C11+C12

End results would be as follows: -

в Particulars Given 1 2 Excess Capacity 3 Selling price 4. Variable costs 5 Selling cost 6 Transfer Price 22.000 80 16 75 | 23 7 <transfer price <transfer price> 80 80 8 Using Selling price less avoidable costs 76 9 Using Variable costs 12 10 11 Increase in net income of Selling Division 1,298,000 12 Increase in net income of Buying Division 110,000 13 Increase in net income of Overall Corporation | 1,408,000 154,000 1,254,000 1,408,000