Exercise 11A-2 Transfer Pricing from the Viewpoint of the Entire Company [LO11-5

Question

Exercise 11A-2 Transfer Pricing from the Viewpoint of the Entire Company [LO11-5] Division A manufactures electronic circuit boards. The boards can be sold either to Division B of the same company or to outside customers. Last year, the following activity occurred in Division A: Selling price per circuit board178 Variable cost per circuit board Number of circuit boards: Produced during the year Sold to outside customers Sold to Division B 20,300 15,500 4,800 Sales to Division B were at the same price as sales to outside customers. The circuit boards purchased by Division B were used in arn electronic instrument manufactured by that division (one board per instrument). Division B incurred $210 in additional variable cost per instrument and then sold the instruments for $680 each.

Explanation / Answer

Req 1: Income statement Division A Division B Total Sales DivA(20,300 units@178) 3613400 DivB(4800 units@680) 3264000 6877400 Expense Added by division: DivA(20300 units@126) 2557800 Div B(4800units@210) 1008000 3565800 Transfer price paid by Div B @178 854400 854400 Total expense 2557800 1862400 4420200 Net Operating income 1055600 1401600 2457200 Req 2: Contribution earned by DIV A Selling price per unit 178 Less: variable cost per unit 126 Contribution per unit earned by Div A 52 Contribution earned by DIV B Selling price per unit 680 Less: Cost added per unit 210 Less: Transfer price of Div A 178 Contribution earnedper unit by Div B 292 The Division A must sell additional 1000 units to Division B as it will increase the overall profit of company by $ 292,000 (292*1000)

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