Question

(1) Provide the missing data in the following Northern Southern Division $250,000 $ (d) Division $(a) (b) $400,000 0.08 Sales Operating assets Net operating income Margin Turnover Return on investment $10,000 (e) (n 10% (c) 16% (2) Division A sells products to Division B. The standard unit costs for Division A are: Direct materials $800 1,500 Direct labor Variable overhead 400 Fixed overhead 300 Variable operating expenses Fixed operating expenses Market price per unit 500 200 4,575 Compute the transfer price based on full cost plus a markup of 20 percent. Compute the transfer price based on variable product costs plus a fixed fee of $400. (3) There are two divisions in XYZ Co. Division A has a product that can be sold either to outside customers or to Division B. The company uses the opportunity cost approach to determine transfer price. Any joint benefits would be split evenly between the two divisions. Information about these divisions is given below: Case 1 Case 2 Division A: 10.000 10,000 Capacity in units Number of units sold externally 10,000 6,000 $100 Market selling price $125 Variable costs per unit 60 72 Fixed costs per unit based on capacity 10 10 Division B: Number of units needed for production 4,000 4,000 Purchase price per unit from external supplier $95 $90 Determine the minimum price, the maximum price, and the optimal transfer price in both cases.

Answer 1

1. Calculate the missing data as shown below: Particulars Sales Operating assets Net operating income Margin Turnover Return on investment Northern Division (a) $5,000,000 (b) $2,500,000 $400,000 0.08 (c) 2 16% Southern Division $250,000 (d) $100,000 $10,000 (e) 0.04 (f) 2.5 10% Supporting Calculations: Northern Division: Average Operating Assets=Net operating income ROI $400,000 16% = $2,500,000 Margin = Net Operating income Sales 0.08 = $400,000 Sales Sales = $400,00 0.08 = $5,000,000 Sales Turnover= Average opraing Assets $5,000,000 $2,500,000 = 2

Southern Division: Average Operating Assets == Net operating income ROI $10,000 10% = $100,000 Net Operating income Margin= Sales $10,000 250,000 = 0.04 Sales Turnover= Average opraing Assets $250,000 $100,000 = 2.5

Calculate transfer price based on full cost plus a markup of 20% Direct material Direct labor Variable overhead Fixed overhead Variable operating expenses Fixed operating expenses Total Cost Markup (20% on total cost) Markup (20%*$3,700) Total Cost + Markup ($3.700+$740 $800 $1,500 $400 $300 $500 $200 $3.700 $740 $4,440 Hence, the transfer price is 4,440. Transfer price based on variable product costs plus fixed fee of $400 as shown below: Direct material Direct labor Variable overhead Fixed fee Total Cost $800 $1,500 $400 $400 $3,100 Hence, the transfer price is $3,100. Note: Variable operating expenses is not a product cost, it is a period cost.

In Case 1 When Demand is enough or more than the production Minimum transfer price is variable cost+ opportunity cost. Minimum transfer price is $100 Maximum transfer price is $95 equal to maximum of external purchase price. b) In Case 2 When Demand is less than Production Minimum Transfer Price is equal to variable cost per unit i.e., $72 Maximum Transfer Price is equal to external purchase price per unit i.e., $90