Question

Exoplex Industries Inc. is a diversified aerospace company, including two operating divisions, Semiconductors and Navigational Systems divisions. 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, 2016

1		Semiconductors Division	Navigational Systems Division	Total
2	Sales:
3	2,240 units @ $396 per unit	$887,040.00		$887,040.00
4	3,675 units @ $590 per unit		$2,168,250.00	2,168,250.00
5		$887,040.00	$2,168,250.00	$3,055,290.00
6	Expenses:
7	Variable:
8	2,240 units @ $232 per unit	$519,680.00		$519,680.00
9	3,675 units @ $472* per unit		$1,734,600.00	1,734,600.00
10	Fixed	220,000.00	325,000.00	545,000.00
11	Total expenses	$739,680.00	$2,059,600.00	$2,799,280.00
12	Income from operations	$147,360.00	$108,650.00	$256,010.00

*$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.? Explain.
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?
3.	Prepare condensed divisional income statements for Exoplex Industries Inc. based on the data in Requirement 2.
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?

Answer 1

1. $432 per unit would not be an appropriate transfer price for Exoplex Industries Inc. Because the Semiconductors Division sells at $396 per unit to outside customers. So it can't charge more for Internal Transfer. If the semiconductor division has Excess capacity, then it should charge variable cost incurred per unit. If it doesn't have excess capacity, it should charge the Market selling price charged to external customers. Thus, $432 per unit is not appropriate transfer price as it is higher than $396 which is charged to external customers.

2.

Semiconductors Division has extra capacity of 2820-2240=580 units.

So for internal transfer of 580 units, there will be no Contribution Loss.

Increase in income for Semiconductors Division= Contribution= (310-232)*580 units= $45240.

Increase in income for Navigational Sysytems Division= Saving in material cost= (432-310)*580=$70760.

Increase in Total Income of Company= 45240+70760=$116000.

3.

Condensed Divisional Income Statement
	Semiconductors Division	Navigational Systems Division	Total
Sales: To External Customers
2,240 units @ $396 per unit	$887040		$887040
3,675 units @ $590 per unit		$2168250	$2168250
Divisional Transfer
580 units @ $310 per unit	$179800		$179800
	$1066840	$2168250	$3235090
Expenses:
Variable:
2,820 units @ $232 per unit	$654240		$654240
(3675-580)=3,095 units @ $472 per unit		$1460840	$1460840
580 units @ (310+40)=$350 per unit		$203000	$203000
Fixed:	$2,20,000	$3,25,000	$545000
Total Expenses	$874240	$1988840	$2863080
Income from operations	$192600	$179410	$372010

4.

Condensed Divisional Income Statement
	Semiconductors Division	Navigational Systems Division	Total
Sales: To External Customers
2,240 units @ $396 per unit	$8,87,040		$8,87,040
3,675 units @ $590 per unit		$21,68,250	$21,68,250
Divisional Transfer
580 units @ $340 per unit	$1,97,200		$1,97,200
	$10,84,240	$21,68,250	$32,52,490
Expenses:
Variable:
2,820 units @ $232 per unit	$6,54,240		$6,54,240
(3675-580)=3,095 units @ $472 per unit		$14,60,840	$14,60,840
580 units @ (340+40)=$380 per unit		$2,20,400	$2,20,400
Fixed:	$2,20,000	$3,25,000	$5,45,000
Total Expenses	$8,74,240	$20,06,240	$28,80,480
Income from operations	$2,10,000	$1,62,010	$3,72,010
-Given Income from operations	-$1,47,360	-$1,08,650	-$2,56,010
Increase in Income from Operations	$62,640	$53,360	$1,16,000