Garcon Inc. manufactures electronic products, with two operatingdivisions, Consumer and Commercial. Condensed divisional incomestatements, which involve no intracompany transfers and whichinclude 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 Ă— $144 per unit | $2,073,600.00 | | $2,073,600.00 |
4 | 21,600 units Ă— $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 Ă— $104 per unit | $1,497,600.00 | | $1,497,600.00 |
9 | 21,600 units Ă— $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 theremaining $43 per unit represents other variable conversionexpenses incurred within the Commercial Division.
The Consumer Division is presently producing 14,400 units out ofa total capacity of 17,280 units. Materials used in producing theCommercial Division’s product are currently purchased from outsidesuppliers at a price of $150 per unit. The Consumer Division isable to produce the materials used by the Commercial Division.Except for the possible transfer of materials between divisions, nochanges are expected in sales and expenses.
| Required: |
| 1. | Would the market price of $150per unit be an appropriate transfer price for Garcon Inc.?Explain. |
| 2. | If the Commercial Divisionpurchases 2,880 units from the Consumer Division, rather thanexternally, at a negotiated transfer price of $115 per unit, howmuch would the income from operations of each division and thetotal company income from operations increase? |
| 3. | Prepare condensed divisionalincome statements for Garcon Inc. based on the data in Requirement2. |
| 4. | If a transfer price of $126 perunit is negotiated, how much would the income from operations ofeach division and the total company income from operationsincrease? |
| 5a. | What is the range of possiblenegotiated transfer prices that would be acceptable for GarconInc.? |
| 5b. | Assuming that the managers ofthe two divisions cannot agree on a transfer price, what pricewould you suggest as the transfer price? |
