In: Accounting
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: | ||||||||||||
85,000 units @ $60 per unit | $5,100,000 | $5,100,000 | ||||||||||
140,000 units @ $115 per unit | $16,100,000 | 16,100,000 | ||||||||||
$5,100,000 | $16,100,000 | $21,200,000 | ||||||||||
Expenses: | ||||||||||||
Variable: | ||||||||||||
85,000 units @ $44 per unit | $(3,740,000) | $(3,740,000) | ||||||||||
140,000 units @ $90 per unit* | $(12,600,000) | (12,600,000) | ||||||||||
Fixed | 250,000 | (600,000) | (850,000) | |||||||||
Total expenses | $(3,990,000) | $(13,200,000) | $(17,190,000) | |||||||||
Operating income | $1,110,000 | $2,900,000 | $4,010,000 |
*$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 85,000 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 $44 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
$
The Communication Systems Division's operating income would
increase by
$
Birrell Scientific Inc.'s total operating income would increase
by
$
Feedback
3. Prepare condensed divisional income statements for Birrell Scientific Inc. based on the data in part (2).
Birrell Scientific, Inc. | |||
Divisional Income Statements | |||
For the Year Ended December 31, 20Y5 | |||
GPS Division | Communication Division | Total | |
Sales: | |||
85,000 units | $
5,100,000 |
$
5,100,000 |
|
25,000 units |
1,300,000 |
1,300,000 |
|
140,000 units | $
16,100,000 |
16,100,000 |
|
$
6,400,000 |
$
16,100,000 |
$
22,500,000 |
|
Expenses: | |||
Variable: | |||
110,000 units | $ | $ | |
25,000 units | $ | ||
115,000 units | |||
Fixed |
250,000 |
600,000 |
850,000 |
Total expenses | $ | $ | $ |
Operating income | $
1,110,000 |
$ | $ |
Feedback
3. Keep in mind, 25,000 units are transferred in at $52 per unit plus $38 in other variable conversion expenses incurred within the division.
4. If a transfer price of $49 per unit is negotiated, 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
$
The Communication Systems Division's operating income would
increase by
$
Birrell Scientific Scientific Inc.'s total operating income
would increase by
$
5a. What is the range of possible negotiated transfer prices that would be acceptable for Birrell Scientific Inc.?
Between $
and $5b. Assuming that the managers of the two divisions cannot agree on a transfer price, what transfer price would represent the best compromise? If required, round your answer to the nearest dollar.
$52