Question

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
155,000 units @ $115 per unit				$17,825,000			17,825,000
	$5,100,000			$17,825,000			$22,925,000
Expenses:
Variable:
85,000 units @ $41 per unit	$(3,485,000)						$(3,485,000)
155,000 units @ $90 per unit*				$(13,950,000)			(13,950,000)
Fixed	250,000			(600,000)			(850,000)
Total expenses	$(3,735,000)			$(14,550,000)			$(18,285,000)
Operating income	$1,365,000			$3,275,000			$4,640,000

*$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 $41 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
$

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Review how transfer pricing functions.

2. Multiply the units transferred by the difference between the transfer price (supplying company) or the market price (purchasing company) and the variable cost per unit.

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	$		$
25,000 units
155,000 units		$
	$	$	$
Expenses:
Variable:
110,000 units	$		$
25,000 units		$
130,000 units
Fixed
Total expenses	$	$	$
Operating income	$	$	$

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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.

$51

Answer 1

Ans 1

Ans 1	Transfer Price of 150 from the point of view of Consumer Division
	Will Be acceptable to Consumer division since it would maximize the profit of Consumer Division.
	Transfer Price of 150 from the point of view of Commercial Division
	Commercial Division will be indifferent as to the source of purchase and may go for external vendors eroding the CARGON overall profitability. A market price of 150 would be a hindrance to the overall profitability.
	Ans 2 Details Details Consumer Division income Commercial Division Income Combined Income Contribution from Internal Transfer Price-Revenue from Additional Capacity sales 2880*(115-104) 31680                 31,680.00 Reduction in Purchase Price cost 2880*(150-115)           1,00,800.00              1,00,800.00 Increase in income                 31,680.00           1,00,800.00              1,32,480.00 Ans 3 GARCON INC. Divisional Income Statements For the Year Ended December 31, 2016 1 Details Consumer Division Commercial Division Total 2 Sales: External 3 14,400 units @ $144 per unit 20,73,600.00 20,73,600.00 4 21,600 units @ $275 per unit 59,40,000.00 59,40,000.00 Sales: Internal 0.00 5 2880 Units @ 115 3,31,200.00 3,31,200.00 Total Sales 24,04,800.00 59,40,000.00 83,44,800.00 6 Expenses: 7 Variable: 8 17280 units @ $104 per unit 17,97,120.00 17,97,120.00 9 18720 units @ $193* per unit 36,12,960.00 36,12,960.00 2880 units @ $158* per unit 4,55,040.00 4,55,040.00 10 Fixed 2,00,000.00 5,20,000.00 7,20,000.00 11 Total expenses 19,97,120.00 45,88,000.00 65,85,120.00 12 Income from operations 4,07,680.00 13,52,000.00 17,59,680.00 Ans 4 Details Details Consumer Division income Commercial Division Income Combined Income Contribution from Internal Transfer Price-Revenue from Additional Capacity sales 2880*(126-104) 63360                 63,360.00 Reduction in Purchase Price cost 2880*(150-126)               69,120.00                 69,120.00 Increase in income                 63,360.00               69,120.00              1,32,480.00