Question

X-Com is a computer manufacturer located in the United States. A key component of their computer is the y-chip; Each computer needs one y-chip. All y-chips are produced by the "Y-Chip Division" of X-Com, and the Y-Chip Division is located in India. X-Com's Computer Division (located in the US) purchases all its y-chip needs from the Y-Chip Division. Y-Chip Division has the capacity to produce 150,000 chips.

Price and cost information for the two divisions are as follows:

Sales price of computer --- $850

Variable manufacturing cost per computer (excluding the y-chip cost) for the Computer Division:

Materials --------------------- $400

Labor -------------------------  $250

Additional parts cost if y-chip is purchased externally -- $5

Fixed costs of the Computer Division per year --- $2,000,000

Variable cost of the y-chip division (per chip):

Variable manufacturing cost ---- $60

Variable selling cost (if y-chip is sold to external customers) ---- $2

Selling price of the y-chip for external customers ---- $95

Buying price of the y-chip from external suppliers --- $85

** Assume that the company manufactures 150,000 computers and both divisions have no changes in inventory. There are no fixed costs associated with the Y-Chip Division. Income tax rates are as follows: India 40%, United States 30% **

Calculate the pre- and post-tax operating income for each division and the company at the following transfer prices:

1.) Transfer Price--- At $85

2.) Transfer Price--- At $60

3.) Transfer Price--- At $72.50

*Note: Show the calculation for pre/post tax operating income(s).

Answer 1

X COM Y CHIP DIVISION 1) Transfer Price at 85: 1) Transfer Price at 85: Amount Particulars Units sold Amount of Revenue Cost of Material Cost of Labour Cost of additional part for Y Chip Fixed Cost Y Chip Cost Operating Income Pre Tax Units / Rate per unit 1,50,000 850 400 250 12,75,00,000 6,00,00,000 3,75,00,000 7,50,000 20,00,000 1,27,50,000 1,45,00,000 43,50,000 1,01,50,000 Particulars Units sold Amount of Revenue Cost of Manufacturing Cost of Selling Operating Income Pre Tax Tax Operating Income Post Tax Units / Rate per unit Amount 1,50,000 851,27,50,000 60 90,00,000 2 3,00,000 34,50,000 40% 13,80,000 20,70,000 85 Tax 30% Operating Income Post Tax

X COM Transfer Price at 60: Y CHIP DIVISION 2) Transfer Price at 60: 2) 60 Particulars Units sold Amount of Revenue Cost of Material Cost of Labour Cost of additional part for Y Chip Fixed Cost Y Chip Cost Operating Income Pre Tax | Тах Operating Income Post Tax Units / Rate per Amount 1,50,000 850 12,75,00,000 400 6,00,00,000 250 3,75,00,000 7,50,000 20,00,000 90,00,000 1,82,50,000 30% 54.75,000 1,27,75,000 Particulars Units sold Amount of Revenue Cost of Manufacturing Cost of Selling Operating Income Pre Tax Tax Operating Income Post Tax Units / Rate per Amount 1,50,000 60 90,00,000 90,00,000 3,00,000 -3,00,000 40% -1,20,000 -1,80,000 60

X COM Transfer Price at 72.50: Y CHIP DIVISION 3) Transfer Price at 72.50: 3) Particulars Units sold Amount of Revenue Cost of Material Cost of Labour Cost of additional part for Y Chip Fixed Cost Y Chip Cost Operating Income Pre Tax Tax Operating Income Post Tax Units / Rate per Amount 1,50,000 850 12,75,00,000 400 6,00,00,000 250 3,75,00,000 7,50,000 20,00,000 1,08,75,000 1,63,75,000 30% 49,12,500 1,14,62,500 Particulars Units sold Amount of Revenue Cost of Manufacturing Cost of Selling Operating Income Pre Tax Tax Operating Income Post Tax 2 Units / Rate per Amount 1,50,000 731,08,75,000 60 90,00,000 3,00,000 15,75,000 40% 6,30,000 9,45,000 73