Question

Garcon Inc. manufactures electronic products, with two operating divisions, Consumer and Commercial. Condensed divisional income statements, which involve no intracompany transfers and which include a breakdown of expenses into variable and fixed components, are as follows:

Garcon Inc.

Divisional Income Statements

For the Year Ended December 31, 20Y2

1		Consumer Division	Commercial Division	Total
2	Sales:
3	14,400 units × $144 per unit	$2,073,600.00		$2,073,600.00
4	21,600 units × $275 per unit		$5,940,000.00	5,940,000.00
5	Total sales	$2,073,600.00	$5,940,000.00	$8,013,600.00
6	Expenses:
7	Variable:
8	14,400 units × $104 per unit	$1,497,600.00		$1,497,600.00
9	21,600 units × $193* per unit		$4,168,800.00	4,168,800.00
10	Fixed	200,000.00	520,000.00	720,000.00
11	Total expenses	$1,697,600.00	$4,688,800.00	$6,386,400.00
12	Income from operations	$376,000.00	$1,251,200.00	$1,627,200.00

*$150 of the $193 per unit represents materials costs, and the remaining $43 per unit represents other variable conversion expenses incurred within the Commercial Division.

The Consumer Division is presently producing 14,400 units out of a total capacity of 17,280 units. Materials used in producing the Commercial Division’s product are currently purchased from outside suppliers at a price of $150 per unit. The Consumer Division is able to produce the materials used by the Commercial Division. Except for the possible transfer of materials between divisions, no changes are expected in sales and expenses.

2. If the Commercial Division purchases 2,880 units from the Consumer Division, rather than externally, at a negotiated transfer price of $115 per unit, how much would the income from operations of each division and the total company income from operations increase?

The Consumer Division's income from operations would increase by _____________

The Commercial Division's income from operations would increase by _____________
Garcon Inc.’s total income from operations would increase by ____________
3. Prepare condensed divisional income statements for Garcon Inc. based on the data in Requirement 2.

Garcon Inc.

Divisional Income Statements

For the Year Ended December 31, 20Y2

1		Consumer Division	Commercial Division	Total
2	Sales:
3	14,400 units
4	2,880 units
5	21,600 units
6	Total sales
7	Expenses:
8	Variable:
9	17,280 units
10	2,880 units
11	18,720 units
12	Fixed
13	Total expenses
14	Income from operations

4. If a transfer price of $126 per unit is negotiated, how much would the income from operations of each division and the total company income from operations increase?

The Consumer Division's income from operations would increase by ____________

The Commercial Division's income from operations would increase by _____________
Garcon Inc.'s total income from operations would increase by ___________
5. Assuming that the managers of the two divisions cannot agree on a transfer price, what price would you suggest as the transfer price?

Answer 1

ANSWER
The profits of the consumer division will be at higher level if transfer price is $150. For commercial division, the market price of $150 is an issue for overall profitability. It is possible that commercial division select the external vendors for material supplies to maintain the profitability in such case. Determine the increase in income from operations of each division and increase in company's total income as given below: А B Consumer division income Commercial division income Combined income Details Contribution from internal transfer 2 price Reduction in 3 purchase price cost 4. Increase in income $31,680 $0 $31,680 $0 $31,680 $1,00,800 $1,00,800 $1,00,800 $1,32,480 Determine the increase in income from operations of each division and increase in company's total income using spreadsheet formulas as given below: B Consumer Commercial division income division income Combined income Details Contribution from 2 internal transfer price =2880*(115-104) 0 =B2+C2 Reduction in purchase 3 price cost =2880*(150-115) =B3+C3 4. Increase in income =B2+B3 =C2+C3 =D2+D3

3) Prepare the condensed divisional income statements for company G as given below: A B C D Company G Divisional income statements For the year ended December 31, 2016 Consumer Commercial 4 Details division division Total 5 Sales: 6 External $20,73,600| $0 $20,73,600 7 Internal $3,31,200 $59,40,000 $62,71,200 8 Total sales $24,04,800 $59,40,000 $83,44,800 9 Expenses: 10 Variable |$17,97,1201 $36,12,960 $54,10,080 11 $4,55,040 $4,55,040 12 Fixed $2,00,000 $5,20,000 $7,20,000 Total 13 expenses $19,97,120 $45,88,000 $65,85,120 Income from 14 operations $4,07,680 $13,52,000 $17,59,680

Prepare the condensed divisional income statements for company Gusing spreadsheet formulas as given below: B Company G Divisional income statements For the year ended December 31, 2016 Consumer division Commercial division Total Details 5 Sales: 6 External 7 Internal 8 Total sales 9 Expenses: 10 Variable =14400*144 =2880*115 =B6+B7 =21600*275 =C6+C7 =B6+C6 =B7+C7 =D6+D7 =17280*104 =18720*193 =2880*158 520000 =B10+C10 =B11+C11 =B12+C12 12 Fixed 200000 13 Total expenses =B10+B12 =C10+C11+C12 =D10+D11+D12 14 Income from operations =B8-B13 =C8-C13 =D8-D13 Determine the increase in income from operations of each division and increase in company's total income when transfer price is $126 per unit as given below: в с Consumer Commercial division division Combined income income income Details Contribution from internal transfer 2 price $63,360 $0 $63,360 Reduction in 3 purchase price cost 4 Increase in income $69,120) $69,120 $69,120 $1,32,480 $63,360

Determine the increase in income from operations of each division and increase in company's total income when transfer price is $126 per unit using spreadsheet formulas as given below: B Consumer Commercial division income division income Combined income Details Contribution from 2 internal transfer price =2880*(126-104) 0 =B2+C2 Reduction in purchase 3 price cost O 4 Increase in income =B2+B3 1=2880*(150-126) =B3+C3 =C2+C3 I=D2+D3

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