Burdeno Appliances has two divisions, Sales and Financing. Sales is responsible for selling Burdeno's inventory and maintaining inventory for future sale. Financing Division takes loan applications, packages loans into pools, and sells them in the financial markets. It also services the loans. Both divisions meet the requirements for segment disclosures under accounting rules. Sales Division had $28 million in sales last year. Costs, other than those charged by Financing Division, totaled $26 million. Financing Division earned revenues of $4.5 million from servicing loans and incurred outside costs of $5.0 million. In addition, Financing charged Operations $900,000 for loan-related fees. Sales' manager complained to corporate that Financing was charging 150 percent of the commercial rate for loan-related fees and that Sales would be better off sending its buyers to an outside lender. Financing's manager replied that although commercial rates could be lower, servicing these loans is more difficult, thereby justifying the higher fees. Required: a. What are the reported segment operating profits for each division, ignoring income taxes and using the $900,000 transfer price for the loan-related fees? b. What are the reported segment operating profits for each division, ignoring income taxes and using a $600,000 (= $900,000 = 150%) commercial rate as the transfer price for the loan-related fees?
Burdeno Appliances has two divisions, Sales and Financing. Sales is responsible for selling Burdeno's inventory and maintaining inventory for future sale. Financing Division takes loan applications, packages loans into pools, and sells them in the financial markets. It also services the loans. Both divisions meet the requirements for segment disclosures under accounting rules. Sales Division had $28 million in sales last year. Costs, other than those charged by Financing Division, totaled $26 million. Financing Division earned revenues of $4.5 million from servicing loans and incurred outside costs of $5.0 million. In addition, Financing charged Operations $900,000 for loan-related fees. Sales' manager complained to corporate that Financing was charging 150 percent of the commercial rate for loan-related fees and that Sales would be better off sending its buyers to an outside lender. Financing's manager replied that although commercial rates could be lower, servicing these loans is more difficult, thereby justifying the higher fees. Required: a. What are the reported segment operating profits for each division, ignoring income taxes and using the $900,000 transfer price for the loan-related fees? b. What are the reported segment operating profits for each division, ignoring income taxes and using a $600,000 (= $900,000 = 150%) commercial rate as the transfer price for the loan-related fees?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Transcribed Image Text:Burdeno Appliances has two divisions, Sales and Financing. Sales is responsible for selling Burdeno's inventory and maintaining
inventory for future sale. Financing Division takes loan applications, packages loans into pools, and sells them in the financial markets.
It also services the loans. Both divisions meet the requirements for segment disclosures under accounting rules.
Sales Division had $28 million in sales last year. Costs, other than those charged by Financing Division, totaled $26 million. Financing
Division earned revenues of $4.5 million from servicing loans and incurred outside costs of $5.0 million. In addition, Financing charged
Operations $900,000 for loan-related fees. Sales' manager complained to corporate that Financing was charging 150 percent of the
commercial rate for loan-related fees and that Sales would be better off sending its buyers to an outside lender.
Financing's manager replied that although commercial rates could be lower, servicing these loans is more difficult, thereby justifying
the higher fees.
Required:
a. What are the reported segment operating profits for each division, ignoring income taxes and using the $900,000 transfer price for
the loan-related fees?
b. What are the reported segment operating profits for each division, ignoring income taxes and using a $600,000 (= $900,000 =
150%) commercial rate as the transfer price for the loan-related fees?
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