Question

Transfer Pricing

Exoplex Industries Inc. is a diversified aerospace company, including two operating divisions, Semiconductors and Navigational Systems. Condensed divisional income statements, which involve no intracompany transfers and include a breakdown of expenses into variable and fixed components, are as follows:

Exoplex Industries Inc. Divisional Income Statements For the Year Ended December 31, 20Y8
	Semiconductors Division			Navigational Systems Division		Total
Sales:
2,240 units × $396 per unit		$887,040				$887,040
3,675 units × $590 per unit				$2,168,250		2,168,250
Total sales		$887,040		$2,168,250		$3,055,290
Expenses:
Variable:
2,240 units × $232 per unit		$519,680				$519,680
3,675 units × $472* per unit				$1,734,600		1,734,600
Fixed		220,000		325,000		545,000
Total expenses		$739,680		$2,059,600		$2,799,280
Income from operations		$147,360		$108,650		$256,010
*$432 of the $472 per unit represents materials costs, and the remaining $40 per unit represents other variable conversion expenses incurred within the Navigational Systems Division.

The Semiconductors Division is presently producing 2,240 units out of a total capacity of 2,820 units. Materials used in producing the Navigational Systems Division's product are currently purchased from outside suppliers at a price of $432 per unit. The Semiconductors Division is able to produce the components used by the Navigational Systems Division. Except for the possible transfer of materials between divisions, no changes are expected in sales and expenses.

Required:

1. Would the market price of $432 per unit be an appropriate transfer price for Exoplex Industries Inc.?

2. If the Navigational Systems Division purchases 580 units from the Semiconductors Division, rather than externally, at a negotiated transfer price of $310 per unit, how much would the income from operations of each division and total company income from operations increase?

The Semiconductors Division's income from operations would increase by
$

The Navigational Systems Division's income from operations would increase by
$

Exoplex Industries Inc.'s total income from operations would increase by
$

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

Exoplex Industries Inc.
Divisional Income Statements
For the Year Ended December 31, 20Y8
	Semiconductors	Navigational Systems	Total
Sales:
2,240 units	$		$
580 units
3,675 units		$
Total sales	$	$	$
Expenses:
Variable:
2,820 units	$		$
580 units		$
3,095 units
Fixed
Total expenses	$	$	$
Income from operations	$	$	$

4. If a transfer price of $340 per unit is negotiated, how much would the income from operations of each division and total company income from operations increase?

The Semiconductors Division's income from operations would increase by
$

The Navigational Systems Division's income from operations would increase by
$

Exoplex Industries Inc.'s total income from operations would increase by
$

5a. What is the range of possible negotiated transfer prices that would be acceptable for Exoplex Industries Inc.?

Any transfer price   than the Semiconductors Division’s variable expenses per unit but   than the market price would be acceptable.

5b. Assuming that the managers of the two divisions cannot agree on a transfer price, what price would you suggest as the transfer price?
$

Answer 1