2A-C In each of the cases below, assume Division X has a product that can be sold either to outsidecustomers or to Division Y of the same company for use in its production process. The managers ofthe divisions are evaluated based on their divisional profits.CaseABDivision X:Capacity in unitsNumber of units being sold to outside customersSelling price per unit to outside customersVariable costs per unitFixed costs per unit (based on capacity)101,000101,0002$93,00071,0005429$28$148 $4Division Y:Number of units needed for production22,00022,000Purchase price per unit now being paidto an outside supplier50 $28Required:2. Refer to the data in case B above. In this case, there will be no savings in variable selling costs on intracompanysales.a. What is the lowest acceptable transfer price from the perspective of the selling division?b. What is the highest acceptable transfer price from the perspective of the buying division?c. What is the range of acceptable transfer prices (if any) between the two divisions? If the managers are free tonegotiate and make decisions on their own, will a transfer probably take place?

Transfer pricing is the price at which one division sells or provides goods or services to another…

2. Refer to the data in case B above. In this case, there will be no savings in variable selling costs on intracompany sales. a. What is the lowest acceptable transfer price from the perspective of the selling division? b. What is the highest acceptable transfer price from the perspective of the buying division? c. What is the range of acceptable transfer prices (if any) between the two divisions? If the managers are free to negotiate and make decisions on their own, will a transfer probably take place?

2. Refer to the data in case B above. In this case, there will be no savings in variable selling costs on intracompany sales. a. What is the lowest acceptable transfer price from the perspective of the selling division? b. What is the highest acceptable transfer price from the perspective of the buying division? c. What is the range of acceptable transfer prices (if any) between the two divisions? If the managers are free to negotiate and make decisions on their own, will a transfer probably take place?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Capital Gain

Any capital asset when sold can give the seller a higher or lower price from its purchase price leading to a capital gain or capital loss. The time period of holding an asset is decided based on if it is a long term or short-term capital gain. On that basis, the rate of taxation is decided if it is 20%, 15% or according to the tax brackets. The rate of taxation differs in the case of equity or debt, whether long or short term. The capital gain can be adjusted from capital loss to arrive at a net capital gain. The amount of gains and the exemption has to be reported in the tax return filed in the financial year in which the asset was transferred. The tax return can be filed quarterly, monthly, semi-annually or annually.

Question

2A-C

In each of the cases below, assume Division X has a product that can be sold either to outside
customers or to Division Y of the same company for use in its production process. The managers of
the divisions are evaluated based on their divisional profits.
Case
A
B
Division X:
Capacity in units
Number of units being sold to outside customers
Selling price per unit to outside customers
Variable costs per unit
Fixed costs per unit (based on capacity)
101,000
101,000
2$
93,000
71,000
54
29
$
28
$
14
8 $
4
Division Y:
Number of units needed for production
22,000
22,000
Purchase price per unit now being paid
to an outside supplier
50 $
28
Required:
2. Refer to the data in case B above. In this case, there will be no savings in variable selling costs on intracompany
sales.
a. What is the lowest acceptable transfer price from the perspective of the selling division?
b. What is the highest acceptable transfer price from the perspective of the buying division?
c. What is the range of acceptable transfer prices (if any) between the two divisions? If the managers are free to
negotiate and make decisions on their own, will a transfer probably take place?

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