Question

Exercise 11A-2 Transfer Pricing from the Viewpoint of the Entire Company [LO11-5]

Division A manufactures electronic circuit boards. The boards can be sold either to Division B of the same company or to outside customers. Last year, the following activity occurred in Division A:

Selling price per circuit board	$	193
Variable cost per circuit board	$	110
Number of circuit boards:
Produced during the year		20,900
Sold to outside customers		14,100
Sold to Division B		6,800

  
Sales to Division B were at the same price as sales to outside customers. The circuit boards purchased by Division B were used in an electronic instrument manufactured by that division (one board per instrument). Division B incurred $290 in additional variable cost per instrument and then sold the instruments for $660 each.

Required:

1. Prepare income statements for Division A, Division B, and the company as a whole.

2. Assume Division A’s manufacturing capacity is 20,900 circuit boards. Next year, Division B wants to purchase 7,800 circuit boards from Division A rather than 6,800. (Circuit boards of this type are not available from outside sources.) From the standpoint of the company as a whole, should Division A sell the additional 1,000 circuit boards to Division B or continue to sell them to outside customers?

Answer 1

ANSWER

Income Statement for Division A , Division B and Company as Whole
	Division A	Division B	Total Company
Sales	$4,033,700	$4,488,000	$7,209,300
	(20,900UnitX $193)	(6,800UnitX $660)	(14,100 UnitX$193) +(6,800 X 660)
Expenses:
Added by the division	$2,299,000	$1,972,000	$4,271,000
	(20900Unit X $110)	(6,800 UntiX$290)
Transfer Price Paid		1,312,400
		(6,800 $193)
Total Expenses	$2,299,000	$3,284,400	$4,271,000
Net Operating Income	$1,734,700	$1,203,600	$2,938,300

Req 2:
Contribution earned by DIV A
Selling price per unit	$193.00
Less: variable cost per unit	$110.00
Contribution per unit earned by Div A	$83.00
Contribution earned by DIV B
Selling price per unit	$660.00
Less: Cost added per unit	$290.00
Less: Transfer price of Div A	$110.00
Contribution earned per unit by Div B	$260.00

The Division A must sell additional 1000 units to Division B as it will increase the overall profit of company by $ 260,000 (260*1000)

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