Question

Fern Productions has two divisions, A and B, both located in South Carolina. Division A produces 5000 units of Component X at a variable cost of $100 per unit and a fixed cost of $90,000 per year. Division A sells 4000 units of Component X at $275 per unit to outside parties and transfers 1000 units of Component X to Division B. Division B adds another $90 in variable costs to Component X, has fixed costs of $75,000 per year, and sells the final product, X-Plus, for $500 per unit. Assume there are no beginning or ending inventories or taxes. If Fern's transfer pricing policy is variable cost plus 10%, what is the annual operating income of Division A?

Answer 1

Calculation of Annual Operating Income of Division A: Step 1: Calculation of Transfer Price Per Unit: Variable Cost Per Unit 100.00 Add: Markup ($100 x 10%) 10.00 Transfer Price Per Unit $ 110.00 Calculation of Operating Income of Division A: $ 1,100,000.00 $ 110,000.00 $1,210,000.00 Sales to Outside Parties (4000 x $275) Sales to Division B (1000 x $110) Total Sales Less: Variable Costs (5000 x $100) Contribution Margin Less: Fixed Costs Operating Income $ (500,000.00) $ 710,000.00 $ 190,000.00) $ 620,000.00 So, Annual Operating Income of Division A is $620,000.