LO 5 os Interpreting Managerial Reports: Transfer Pricing CS, BUSINESS APPLICATI
ID: 2601371 • Letter: L
Question
LO 5 os Interpreting Managerial Reports: Transfer Pricing CS, BUSINESS APPLICATION Dalton Industries, Inc., has two major operating divi- sions, the Furniture Division and the Electronics Division. The company's main product is a deluxe entertainment center. The centers' components (shelving, drawers, and glass cabinet doors) are manufactured by the Furniture Division, and the Electronics Division produces all electronic components (HDTV receivers, portable electronics docking sta- tions, speakers, etc.) and assembles the sets. The company has a decentralized organiza- tional structure. Continued)Explanation / Answer
1. The price should be 109.20
Direct materials 32
Direct Labor 15
Variable overhead 12
Fixed Overhead 18
Fixed Selling Expenses 6
Fixed General and
administrative expenses 8
91
+ Profit 20% 18.2
Transfer Price 109.20
(Assumption- Variable selling expenses are incurred only when the product is sold in outside market)
a) Current market price of 120 should not be selected because at this price electronics divisions will incur losses since the price in the market for entertainment center has been reduced by the company due to heavy competition.
b) Current outside market price of 110 should not be selected because this price is based on large-quantity discount and will increase the storage cost for the electronics division and thus lower the profits.
c) Total unit manufacturing cost plus profit margin (77+15.4) should not be selected because in this price only following costs are included:-
Direct materials 32
Direct Labor 15
Variable overhead 12
Fixed Overhead 18
77
+ Profit 20% 15.4
Transfer Price 92.4
Since the furniture division is able to sell it to only furniture division it will make sure to charge a price which can cover its fixed expenses. And in the above price fixed selling expenses and fixed general and administrative expenses are not included.
2. If there were an outside market for all units produced by the furniture division at 120, our answer in 1 will not change because the difference in both the prices (i.e, 120 and 109.2) is only because of variable selling expenses which will be incurred only when the product is sold in outside market.
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