The Aqua Company manufactures and sells television sets.Its assembly division (AD) buys television screens from the screen division (SD) and assembles the TV sets.The SD, which is operating at capacity, incurs an incremental manufacturing cost of $60 per screen. The SD can sell all its output to the outside market at a price of $110 per screen, after incurring a variable marketing and distribution cost of $10 per screen. If the AD purchases screens from outside suppliers at a price of $110 per screen, it will incur a variable purchasing cost of $8 per screen. Aqua's division managers can act autonomously to maximize their own division's operating income.1. What is the minimum transfer price at which the SD manager would be willing to sell screens to the AD?2. What is the maximum transfer price at which the AD manager would be willing to purchase screens from the SD?3. Now suppose that the SD can sell only 80% of its output capacity of 10,000 screens per month on the open market. Capacity cannot be reduced in the short run. The AD can assemble and sell more than 10,000 TV sets per month.a. What is the minimum transfer price at which the SD manager would be willing to sell screens to the AD?b. From the point of view of Aqua's management, how much of the SD output should be transferred to the AD?c. If Aqua mandates the SD and AD managers to "split the difference" on the minimum and maximum transfer prices they would be willing to negotiate over, what would be the resulting transfer price? Does this price achieve the outcome desired in requirement 3b? 23-26 General guideline, transfer pricing. The Aqua Company manufactures and sells television sets.Its assembly division (AD) buys television screens from the screen division (SD) and assembles the TV sets.The SD, which is operating at capacity, incurs an incremental manufacturing cost of $60 per screen. The SDcan sell all its output to the outside market at a price of $110 per screen, after incurring a variable market-ing and distribution cost of $10 per screen. If the AD purchases screens from outside suppliers at a price of$110 per screen, it will incur a variable purchasing cost of $8 per screen. Aqua's division managers can actautonomously to maximize their own division's operating income.1. What is the minimum transfer price at which the SD manager would be willing to sell screens to the AD?2. What is the maximum transfer price at which the AD manager would be willing to purchase screensfrom the SD?3. Now suppose that the SD can sell only 80% of its output capacity of 10,000 screens per month on theopen market. Capacity cannot be reduced in the short run. The AD can assemble and sell more than10,000 TV sets per month.a. What is the minimum transfer price at which the SD manager would be willing to sell screens tothe AD?b. From the point of view of Aqua's management, how much of the SD output should be transferredto the AD?c. If Aqua mandates the SD and AD managers to "split the difference" on the minimum and maxi-mum transfer prices they would be willing to negotiate over, what would be the resulting transferprice? Does this price achieve the outcome desired in requirement 3b?

Step 1: Minimum Transfer Price (SD to AD)The SD manager would be willing to sell screens to the AD…

23-26 General guideline, transfer pricing. The Aqua Company manufactures and sells television sets. Its assembly division (AD) buys television screens from the screen division (SD) and assembles the TV sets. The SD, which is operating at capacity, incurs an incremental manufacturing cost of $60 per screen. The SD can sell all its output to the outside market at a price of $110 per screen, after incurring a variable market- ing and distribution cost of $10 per screen. If the AD purchases screens from outside suppliers at a price of $110 per screen, it will incur a variable purchasing cost of $8 per screen. Aqua's division managers can act autonomously to maximize their own division's operating income. 1. What is the minimum transfer price at which the SD manager would be willing to sell screens to the AD? 2. What is the maximum transfer price at which the AD manager would be willing to purchase screens from the SD? 3. Now suppose that the SD can sell only 80% of its output capacity of 10,000 screens per month on the open market. Capacity cannot be reduced in the short run. The AD can assemble and sell more than 10,000 TV sets per month. a. What is the minimum transfer price at which the SD manager would be willing to sell screens to the AD? b. From the point of view of Aqua's management, how much of the SD output should be transferred to the AD? c. If Aqua mandates the SD and AD managers to "split the difference" on the minimum and maxi- mum transfer prices they would be willing to negotiate over, what would be the resulting transfer price? Does this price achieve the outcome desired in requirement 3b?

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter11: Differential Analysis And Product Pricing

Section: Chapter Questions

Problem 23E: Variable cost method of product pricing Based on the data presented in Exercise 17, assume that...

See similar textbooks

Related questions

Question

The Aqua Company manufactures and sells television sets. Its assembly division (AD) buys television screens from the screen division (SD) and assembles the TV sets. The SD, which is operating at capacity, incurs an incremental manufacturing cost of $60 per screen. The SD can sell all its output to the outside market at a price of $110 per screen, after incurring a variable marketing and distribution cost of $10 per screen. If the AD purchases screens from outside suppliers at a price of $110 per screen, it will incur a variable purchasing cost of $8 per screen. Aqua's division managers can act autonomously to maximize their own division's operating income. 1. What is the minimum transfer price at which the SD manager would be willing to sell screens to the AD? 2. What is the maximum transfer price at which the AD manager would be willing to purchase screens from the SD? 3. Now suppose that the SD can sell only 80% of its output capacity of 10,000 screens per month on the open market. Capacity cannot be reduced in the short run. The AD can assemble and sell more than 10,000 TV sets per month. a. What is the minimum transfer price at which the SD manager would be willing to sell screens to the AD? b. From the point of view of Aqua's management, how much of the SD output should be transferred to the AD? c. If Aqua mandates the SD and AD managers to "split the difference" on the minimum and maximum transfer prices they would be willing to negotiate over, what would be the resulting transfer price? Does this price achieve the outcome desired in requirement 3b?

23-26 General guideline, transfer pricing. The Aqua Company manufactures and sells television sets.
Its assembly division (AD) buys television screens from the screen division (SD) and assembles the TV sets.
The SD, which is operating at capacity, incurs an incremental manufacturing cost of $60 per screen. The SD
can sell all its output to the outside market at a price of $110 per screen, after incurring a variable market-
ing and distribution cost of $10 per screen. If the AD purchases screens from outside suppliers at a price of
$110 per screen, it will incur a variable purchasing cost of $8 per screen. Aqua's division managers can act
autonomously to maximize their own division's operating income.
1. What is the minimum transfer price at which the SD manager would be willing to sell screens to the AD?
2. What is the maximum transfer price at which the AD manager would be willing to purchase screens
from the SD?
3. Now suppose that the SD can sell only 80% of its output capacity of 10,000 screens per month on the
open market. Capacity cannot be reduced in the short run. The AD can assemble and sell more than
10,000 TV sets per month.
a. What is the minimum transfer price at which the SD manager would be willing to sell screens to
the AD?
b. From the point of view of Aqua's management, how much of the SD output should be transferred
to the AD?
c. If Aqua mandates the SD and AD managers to "split the difference" on the minimum and maxi-
mum transfer prices they would be willing to negotiate over, what would be the resulting transfer
price? Does this price achieve the outcome desired in requirement 3b?

Expert Solution

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here