Garcon Inc. manufactures electronic products, with two operating divisions, the

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 Consumer Commercial Total Division Division 2 Sales 3 14,400 units@ $144 per unit 4 21,600 units@ $275 per unit $2,073,600.00 $2,073,600.00 540000.00 2,073,600.00 $5,940,000.00 $8,013,600.00 940,000.00

Explanation / Answer

Solution 1 Since variable cost is 115, It is not advisable to set the transfer fee @ 150. At transfer price of150 commerical division will be indifferent to purchase the requirement from consumer division. In this case the company will suffer loss as the produce which can be made available @ 115 is being purchased @ 150 Solution 2 Consumer division Commercial division Total Sale 14400 units @ 144 per unit                    2,073,600     2,073,600 2880 units @ 115 per unit                        331,200         331,200 21600 units @ 275 per unit                        5,940,000     5,940,000 Total Revenue                    2,404,800                        5,940,000     8,344,800 Variable cost 17280 units @ 104 per unit                  (1,797,120) (1,797,120) 18720 units @ 193 per unit                      (3,612,960) (3,612,960) 2880 units @ 158 per unit                         (455,040)       (455,040) Total Variable Cost                  (1,797,120)                      (4,068,000) (5,865,120) Total Fixed Cost                      (200,000)                         (520,000)       (720,000) Total Cost                  (1,997,120)                      (4,588,000) Operating profit                        407,680                        1,352,000     1,759,680 Old operating profit                        376,000                        1,251,200     1,627,200 Increase in Profits                          31,680                            100,800         132,480 Solution 3 Consumer division Commercial division Total Sale 14400 units @ 144 per unit                    2,073,600     2,073,600 2880 units @ 126 per unit                        362,880         362,880 21600 units @ 275 per unit                        5,940,000     5,940,000 Total Revenue                    2,436,480                        5,940,000     8,376,480 Variable cost 17280 units @ 104 per unit                  (1,797,120) (1,797,120) 18720 units @ 193 per unit                      (3,612,960) (3,612,960) 2880 units @ 169 per unit                         (486,720)       (486,720) Total Variable Cost                  (1,797,120)                      (4,099,680) (5,896,800) Total Fixed Cost                      (200,000)                         (520,000)       (720,000) Total Cost                  (1,997,120)                      (4,619,680) Operating profit                        439,360                        1,320,320     1,759,680 Old operating profit                        376,000                        1,251,200     1,627,200 Increase in Profits                          63,360                              69,120         132,480

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