Company has two diviSions, Division A and Division B. Division A produces a part that is used in the finished product of Division B. The cost of producing each part are: Direct Materials Direct Labor Variable overhead Fixed costs Р4 P 2 P 2 P 2 The part is sold in the highly competitive market for P12 each. Division Bis buying 60% of the output of Division A currently at a negotiated price of P11 each. Due to emphasis on divisional welfare rather than company welfare, a new transfer price must be developed. The suggestion was to add 40% to the total costs of the part when transferring to Division B. Another proposal was to use the variable costs of P8 per part in arriving at a transfer price. Division A transferred 1,000 parts to Division B. Pertinent data of Division Bas follows:

Company has two diviSions, Division A and Division B. Division A produces a part that is used in the finished product of Division B. The cost of producing each part are: Direct Materials Direct Labor Variable overhead Fixed costs Р4 P 2 P 2 P 2 The part is sold in the highly competitive market for P12 each. Division Bis buying 60% of the output of Division A currently at a negotiated price of P11 each. Due to emphasis on divisional welfare rather than company welfare, a new transfer price must be developed. The suggestion was to add 40% to the total costs of the part when transferring to Division B. Another proposal was to use the variable costs of P8 per part in arriving at a transfer price. Division A transferred 1,000 parts to Division B. Pertinent data of Division Bas follows:

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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Question

100%

Determine the gross profit per unit for Division B based on the following transfer pricing method:

1. Gross profit per unit for Division B under Market price method

2. Gross profit per unit for Division B under Negotiated price method

The TP Company has two divisions, Division A and Division B. Division A produces a part that is used
in the finished product of Division B. The cost of producing each part are:
Direct Materials
Direct Labor
Variable overhead
Fixed costs
P 4
P 2
P 2
P2
The part is sold in the highly competitive market for P12 each.
Division Bis buying 60% of the output of Division A currently at a negotiated price of P11 each. Due
to emphasis on divisional welfare rather than company welfare, a new transfer price must be
developed. The suggestion was to add 40% to the total costs of the part when transferring to Division
B. Another proposal was to use the variable costs of P8 per part in arriving at a transfer price. Division
A transferred 1,000 parts to Division B.
Pertinent data of Division Bas follows:
In addition to the transfer price of each part, there are additional processing and marketing costs of
P6 and P4 per unit, respectively. The selling price of the finished product of Division Bis P26.

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