Exercise 11A-2 Transfer Pricing from the Viewpoint of the Entire Company [LO11-5
ID: 2566174 • Letter: E
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 boarod Variable cost per circuit boarod Number of circuit boards: $186 $111 Produced during the year Sold to outside customers Sold to Division B 20,500 14,100 6,400 Sales to Division B were at the same price as sales to outside customers. The circuit boards purchased by Division B were used in an electronic instrument manufactured by that division (one board per instrument). Division B incurred $230 in additional variable cost per instrument and then sold the instruments for $660 each. Required: 1. Prepare income statements for Division A, Division B, and the company as a whole.Explanation / Answer
Division A Division B Total Company
Sales $3,813,000 *1 $4,224,000 * 2 $8,037,000 *3
Expenses:
Added by the division $2,275,500 $1,472,000 $3,747,500
Transfer price paid $1,190,400
Total expenses $2,275,500 $2,662,400 $3,747,500
Net operating income $1,537,500 $1,561,600 $4,289,500
* 1 20,500 units x $ 186 per unit = $ 3,813,000
* 2 6,400 units x $660 per unit = $ 4,224,000
* 3 Division A outside sales (14,100 units x $ 186 per unit) = $ 3,813,000
Division B outside sales (6,400 units x $ 660 per unit) = $ 4,224,000
Total outside sales = $ 8,037,000
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