Question

Birrell Scientific Inc. manufactures electronic products, with two operating divisions, the GPS Systems and Communication Systems 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:

Birrell Scientific Inc. Divisional Income Statements For the Year Ended December 31, 20Y5
	GPS Systems Division			Communication Systems Division			Total
Sales:
95,000 units @ $60 per unit	$5,700,000						$5,700,000
140,000 units @ $115 per unit				$16,100,000			16,100,000
	$5,700,000			$16,100,000			$21,800,000
Expenses:
Variable:
95,000 units @ $42 per unit	$(3,990,000)						$(3,990,000)
140,000 units @ $90 per unit*				$(12,600,000)			(12,600,000)
Fixed	250,000			(500,000)			(750,000)
Total expenses	$(4,240,000)			$(13,100,000)			$(17,340,000)
Operating income	$1,460,000			$3,000,000			$4,460,000

*$60 of the $90 per unit represents materials costs, and the remaining $30 per unit represents other variable conversion expenses incurred within the Communication Systems Division.

The GPS Systems Division is presently producing 95,000 units out of a total capacity of 150,000 units. Materials used in producing the Communication Systems Division's product are currently purchased from outside suppliers at a price of $60 per unit. The GPS Systems Division is able to produce the materials used by the Communication Systems Division at a variable cost of $42 per unit. Except for the possible transfer of materials between divisions, no changes are expected in sales and expenses.

Required:

1. Would the market price of $60 per unit be an appropriate transfer price for Birrell Scientific Inc.?
No

2. If the Communication Systems Division purchases 25,000 units from the GPS Systems Division, rather than externally, at a negotiated transfer price of $52 per unit, how much would the operating income of each division and the total company operating income increase?

The GPS Systems Division's operating income would increase by
$ 250,000

The Communication Systems Division's operating income would increase by
$ 200,000

Birrell Scientific Inc.'s total operating income would increase by
$ 450,000

3. Prepare condensed divisional income statements for Birrell Scientific Inc. based on the data in part (2).

Answer 1

ANSWER

1) THE PROFITS OF GPS DIVISION WIL BE AT HIGHER LEVEL IF TRANSFER PRICE IS $60. FOR COMMUNICATION DIVISION THE MARKET PRICE OF $60 IS AN ISSUE FOR OVERALL PROFITABILITY. IT IS POSSIBLE THAT COMMERCIAL DIVISION SELECT THE EXTERNAL VENDORS FOR MATERIAL SUPPLIES TO MAINTAIN THE PROFITABILITY IN SUCH CASE.

2 )INCREASE IN INCOME IN EACH AND ALSO COMBINED

DETAILS	GPS DIVISION	COMMUNICATION DIVISION	COMBINED
CONTRIBUTION FROM	25000*(52-42)	0
INTERNAL TRANFER PRICE	250000		250000
REDUCTION IN PURCHASE COST	0	25000*(60-52)
		200000	200000
INCREASE IN INCOME	250000	200000	450000

3) CONDENSED DIVISIONAL STATEMENT FOR BIRELL SCIENTIFIC INC

BIRELL SCIENTIFIC INC
DIVISIONAL INCOME STATEMENT FOR YEAR 31 DECEMBER 2015
DETAILS	GPS DIVISION	COMMUNICATION DIVISION	TOTAL
SALES
EXTERNAL	5700000	0	5700000
INTERNAL	1300000 (25000*52)	16100000 (140000*115)	17400000
TOTAL SALES	7000000	16100000	23100000
EXPENSES
VARIABLE	6300000 (150000*42)	13500000 (150000*90)	19800000
		1500000	1500000
FIXED	250000	500000	750000
TOTAL EXPENSES	6550000	15500000	22050000
INCOME FROM OPERATIONS	450000	600000	1050000