Garcon Inc. manufactures electronic products, with two operating divisions, the
ID: 2445143 • Letter: G
Question
Garcon Inc. manufactures electronic products, with two operating divisions, the Consumer and Commercial divisions. 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, 2016
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
$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.
1. Review how transfer pricing functions. Remember the use of the market price approach may not lead to the maximization of total company income.
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?
A.) The Consumer Division's income from operations would increase by
B.) The Commercial Division's income from operations would increase by
C.) Garcon Inc.’s total income from operations would increase by
2. Multiply the units transferred by the difference between the transfer price and the variable cost per unit (supplying company) or the market price and the transfer price (purchasing company).
Divisional Income Statements
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, 2016
1
Consumer Division
Commercial Division
Total
2
Sales:
3
14,400 units
4
2,880 units
5
21,600 units
6
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
Solution
GARCON INC.
Divisional Income Statements
For the Year Ended December 31, 2016
1
Consumer Division
Commercial Division
Total
2
Sales:
3
14,400 units
4
2,880 units
5
21,600 units
6
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
3. When calculating the variable expense, the cost of the units transferred in must be computed as transfer price plus operating cost.
Final Question
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
GARCON INC.
Divisional Income Statements
For the Year Ended December 31, 2016
Explanation / Answer
Ans 1
Ans 1 Transfer Price of 150 from the point of view of Consumer Division Will Be acceptable to Consumer division since it would maximize the profit of Consumer Division. Transfer Price of 150 from the point of view of Commercial Division Commercial Division will be indifferent as to the source of purchase and may go for external vendors eroding the CARGON overall profitability. A market price of 150 would be a hindrance to the overall profitability. Ans 2 Details Details Consumer Division income Commercial Division Income Combined Income Contribution from Internal Transfer Price-Revenue from Additional Capacity sales 2880*(115-104) 31680 31,680.00 Reduction in Purchase Price cost 2880*(150-115) 1,00,800.00 1,00,800.00 Increase in income 31,680.00 1,00,800.00 1,32,480.00 Ans 3 GARCON INC. Divisional Income Statements For the Year Ended December 31, 2016 1 Details Consumer Division Commercial Division Total 2 Sales: External 3 14,400 units @ $144 per unit 20,73,600.00 20,73,600.00 4 21,600 units @ $275 per unit 59,40,000.00 59,40,000.00 Sales: Internal 0.00 5 2880 Units @ 115 3,31,200.00 3,31,200.00 Total Sales 24,04,800.00 59,40,000.00 83,44,800.00 6 Expenses: 7 Variable: 8 17280 units @ $104 per unit 17,97,120.00 17,97,120.00 9 18720 units @ $193* per unit 36,12,960.00 36,12,960.00 2880 units @ $158* per unit 4,55,040.00 4,55,040.00 10 Fixed 2,00,000.00 5,20,000.00 7,20,000.00 11 Total expenses 19,97,120.00 45,88,000.00 65,85,120.00 12 Income from operations 4,07,680.00 13,52,000.00 17,59,680.00 Ans 4 Details Details Consumer Division income Commercial Division Income Combined Income Contribution from Internal Transfer Price-Revenue from Additional Capacity sales 2880*(126-104) 63360 63,360.00 Reduction in Purchase Price cost 2880*(150-126) 69,120.00 69,120.00 Increase in income 63,360.00 69,120.00 1,32,480.00Related Questions
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