Question

6:23 .. 46 < Back 12th week assessment.pdf ELII PREVENUESS LARY. Exercise 2 Fenster Corporation manufactures windows with wood frames Fenster has two divisions, glass and wood. The glass department makes the window glass and send it to the wood department where the glass is framed. The window is then sold to customers at a price of S450 per unit. The glass division is currently required by Fenster to transfer its total yearly output of 22,000 units of glass to the wood division. Unlimited quantities of glass can be purchased and sold on the outside market at $160 per unit The following table gives the manufacturing cost per unit in the glass and wood division for 2017: Glass Division Wood Division $65 Direct material cost Direct manufacturing labour cost Variable MOH cost Fixed MOH cost Total manufacturing cost per 547 SSI S17 Ses $145 $150 Required: 1. Calculate the operating incomes for the glass and the wood divisions for the 22,000 units of glass transferred under the following transfer pricing methods. a) Market price b) Negotiable price of $217,5 2. Suppose Fenster rewards each division manager with a bonus, calculated as 4% of division operating income. Calculate the amount of bonus for each division manger. Which transfer pricing method will each division manager prefer to us! Best of luck

Answer 1

Answer :

1.

Claculation of operating income when glass is transferred at Market price of $160
	22000 units		22000 units
Particulars	Glass Division	Particulars	Wood Division
Sales revenue {Transferring Price($160 per unit)}	$3,520,000	Sales revenue($450 per unit)	$9,900,000
Direct Material cost($30 per unit)	$660,000	Direct Material cost($25 per unit)	$550,000
Direct Manufacturing Labor Cost($47 per unit)	$1,034,000	Direct Manufacturing Labor Cost($65 per unit)	$1,430,000
Variable MOH cost($51 per unit)	$1,122,000	Variable MOH cost($12 per unit)	$264,000
Fixed MOH cost($17 per unit)	$374,000	Fixed MOH cost($48 per unit)	$1,056,000
Total Manufacturing Cost	$3,190,000	Glass Transferring cost	$3,520,000
		Total Manufacturing Cost	$6,820,000
Operating Income	$330,000	Operating Income	$3,080,000

Claculation of operating income when glass is transferred at negotiable price of $217.5
	22000 units		22000 units
Particulars	Glass Division	Particulars	Wood Division
Sales revenue {Transferring Price($217.5 per unit)}	$4,785,000	Sales revenue($450 per unit)	$9,900,000
Direct Material cost($30 per unit)	$660,000	Direct Material cost($25 per unit)	$550,000
Direct Manufacturing Labor Cost($47 per unit)	$1,034,000	Direct Manufacturing Labor Cost($65 per unit)	$1,430,000
Variable MOH cost($51 per unit)	$1,122,000	Variable MOH cost($12 per unit)	$264,000
Fixed MOH cost($17 per unit)	$374,000	Fixed MOH cost($48 per unit)	$1,056,000
Total Manufacturing Cost	$3,190,000	Glass Transferring cost	$4,785,000
		Total Manufacturing Cost	$8,085,000
Operating Income	$1,595,000	Operating Income	$1,815,000

2.Division managers bonus is calculated on divisions operating income.ie 4% on divisions operating income

operating income when glass is transferred at Market price of $160 :

Glass division manger bouns = $330,000*4% =$13,200

Wood division manager bonus =$3,080,000*4% =$123,200

operating income when glass is transferred at negotiable price of $217.5 :

Glass division manger bouns = $1,595,000*4% =$63,800

Wood division manager bonus =$1,815,000*4% =$72,600

Market price transfer pricing method is preferred by Wood division manager as bonus is high($123,200) compared negotibale price ($72,600).

Negotibale price transfer pricing method is preferred by Glass division manager as bonus is high($63,800) compared market price ($13,200).