Exercise 15-22 (Static) Basic Transfer Pricing Issues (LO 15-1) Philadelphia Supply Corporation (PSC) produces and distributes various products for the hospitality industry. It is organized in two divisions: Assembly and Packaging. The managers of both divisions are evaluated and compensated based on divisional income. Assembly only "sells" to Packaging. Packaging prepares the items for a particular customer (adding labels, logos, and so on), prepare them for delivery, and ships them to the customer. Information on revenues and costs for the latest quarter for each division follows. Production and sales quantities, measured in "standard units," were 3,000 units for the quarter. Sales revenue Direct materials Direct labor Variable overhead Fixed costs Assembly $195,000 105,000 55,000 20,000 40,000 Packaging $ 900,000 385,000 170,000 45,000 180,000 A local hotel is hosting a special convention next month and has asked for a special price for 500 units at a total price of $102,500. After hearing about the order, the Assembly Division manager insists that the transfer cost (the transfer price multiplied by 500 units) be set at $40,000. There is sufficient excess capacity in Assembly to handle the special order. Required: a. What is the current transfer price for a unit? b. Does PSC (the corporation) want to accept this order? c. Will the Assembly Division manager be willing to accept this order if the transfer cost is $40.000?
Exercise 15-22 (Static) Basic Transfer Pricing Issues (LO 15-1) Philadelphia Supply Corporation (PSC) produces and distributes various products for the hospitality industry. It is organized in two divisions: Assembly and Packaging. The managers of both divisions are evaluated and compensated based on divisional income. Assembly only "sells" to Packaging. Packaging prepares the items for a particular customer (adding labels, logos, and so on), prepare them for delivery, and ships them to the customer. Information on revenues and costs for the latest quarter for each division follows. Production and sales quantities, measured in "standard units," were 3,000 units for the quarter. Sales revenue Direct materials Direct labor Variable overhead Fixed costs Assembly $195,000 105,000 55,000 20,000 40,000 Packaging $ 900,000 385,000 170,000 45,000 180,000 A local hotel is hosting a special convention next month and has asked for a special price for 500 units at a total price of $102,500. After hearing about the order, the Assembly Division manager insists that the transfer cost (the transfer price multiplied by 500 units) be set at $40,000. There is sufficient excess capacity in Assembly to handle the special order. Required: a. What is the current transfer price for a unit? b. Does PSC (the corporation) want to accept this order? c. Will the Assembly Division manager be willing to accept this order if the transfer cost is $40.000?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Exercise 15-22 (Static) Basic Transfer Pricing Issues (LO 15-1)
Philadelphia Supply Corporation (PSC) produces and distributes various products for the hospitality industry. It is organized in two
divisions: Assembly and Packaging. The managers of both divisions are evaluated and compensated based on divisional income.
Assembly only "sells" to Packaging. Packaging prepares the items for a particular customer (adding labels, logos, and so on), prepares
them for delivery, and ships them to the customer.
Information on revenues and costs for the latest quarter for each division follows. Production and sales quantities, measured in
"standard units," were 3,000 units for the quarter.
Sales revenue
Direct materials
Direct labor
Variable overhead
Fixed costs
a. Current transfer price per unit
h PSC's (the corporation's) decision
e to search
A local hotel is hosting a special convention next month and has asked for a special price for 500 units at a total price of $102,500.
After hearing about the order, the Assembly Division manager insists that the transfer cost (the transfer price multiplied by 500 units)
be set at $40,000. There is sufficient excess capacity in Assembly to handle the special order.
4
Required:
a. What is the current transfer price for a unit?
b. Does PSC (the corporation) want to accept this order?
c. Will the Assembly Division manager be willing to accept this order if the transfer cost is $40,000?
d. Will the Packaging Division manager be willing to accept this order if the transfer cost is $40,000?
4
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Assembly
$195,000
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105,000
55,000
20,000
40,000
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Packaging
$900,000
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385,000
170,000
45,000
180,000
&
7
1
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8
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