Question

2. DesMoines Valley Company has two divisions, Computer Services and Consultancy Services. In addition to their external customers, each division performs work for the other division. The external fees earned by each division in 20X5 were $200,000 for Computer Services and $350,000 for Consultancy Services. Computer Services worked 3,000 hours for Consultancy Services, who, in turn, Consultancy Services worked 1,200 hours for Computer Services. The total costs of external services performed by Computer Services were $110,000 and $240,000 by Consultancy Services.

Required:

a.   Determine the operating income for each division and for the company as a whole if the transfer price from Computer Services to Consultancy Services is $15 per hour and the transfer price from Consultancy Services to Computer Services is $12.50 per hour.

b.   Determine the operating income for each division and for the company as a whole if the transfer price between divisions is $17 per hour.

c.   What are the operating income results for each division and for the company as a whole if the two divisions net the hours worked for each other and charge $12.50 per hour for the one with the excess? Which division manager prefers this arrangement?

3. Dow Company manufactures tables in U.S. The standard (budgeted) cost of one unit is shown below:

Answer 1

(a):

	Computer Services	Consultancy Services	Company
Revenue: External	200,000	350,000	550,000
Internal	45,000	15,000	0
Total	245,000	365,000	550,000
Cost of services incurred	110,000	240,000	350,000
Transferred in	15,000	45,000	0
Total	125,000	285,000	350,000
Operating income	120,000	80,000	200,000

(b):

	Computer Services	Consultancy Services	Company
Revenue: External	200,000	350,000	550,000
Internal	51,000	20,400	-
Total	251,000	370,400	550,000
Cost of services incurred	110,000	240,000	350,000
Transferred in	20,400	51,000	0
Total	130,400	291,000	350,000
Operating income	120,600	79,400	200,000

(c):

	Computer Services	Consultancy Services	Company
Revenue: External	200,000	350,000	550,000
Internal	22,500	-	-
Total	222,500	350,000	550,000
Cost of services incurred	110,000	240,000	350,000
Transferred in	-	22,500	-
Total	110,000	262,500	350,000
Operating income	112,500	87,500	200,000

Thus the manager of Computer Services favors this procedure.

Calculations:

In "a" Internal amount of 45,000 = 3000*15 and 15000 = 1200*12.5

In "b" internal amount of 51000 = 3000*17 and 20400 = 1200*17

In "c" internal amount of 22500 = (3000-1200)*12.5