Spring Waters, Inc., produces bottled drinks. The New York Division acquires the

Question

Spring Waters, Inc., produces bottled drinks. The New York Division acquires the water, adds carbonation, and sells it in bulk quantities to the New Jersey Division of Spring Waters and to outside buyers. The New Jersey Division buys carbonated water in bulk, adds flavoring, bottles it, and sells it.
Last year, the New York Division produced 1,500,000 gallons, of which it sold 1,300,000 gallons to the New Jersey Division and the remaining 200,000 gallons to outsiders for $0.40 per gallon. The New Jersey Division processed the 1,300,000 gallons, which it sold for $1,500,000. New York's variable costs were $440,000 and its fixed costs were $120,000.
The New Jersey Division incurred an additional variable cost of $320,000 and $200,000 of fixed costs. Both divisions operated below capacity.
a. Prepare division income statements assuming the transfer price is at the external market price of $0.40 per gallon.
b. Repeat part a. assuming a negotiated transfer price of $0.30 per gallon is used.
c. Respond to the statement: The choice of a particular transfer price is immaterial to the company as a whole.

Explanation / Answer

Hi,

Please find the answers as follows:

Part A:

Part B:

New Jersey Division

Part C:

The choice of a particular transfer price is immaterial from the perspective of the whole company. However, it does affect the profitability of individual divisions as evident from above calculations.

Thanks.

New Jersey Division Sales 1500000 Less Acquisition/Purchase Costs (1300000*.40) 520000 Additional Variable Costs 320000 Fixed Costs 200000 Net Income 460000

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