Exercise 15-34 (Algo) Evaluate Transfer Pricing System: Negotiated Rates (LO 15-2, 3) Tops Corporation is organized into two divisions, Manufacturing and Marketing. Both divisions are considered to be profit centers and the two division managers are evaluated in large part on divisional income. The company makes a single product. It is fabricated in Manufacturing and then packaged and sold in Marketing. There is no intermediate market for the product. The monthly Income statements, in thousands of dollars, for the two divisions follow. Production and sales amounted to 15,000 units. Marketing $15, 000 6,700 $ 8,300 800 Manufacturing $ 4, 500 Revenues Variable costs contribution margin 3, 900 $4 600 Fixed costs 300 Divisional profit 2$ 300 $ 7,500 Assume there is no special order pending. Required: a. What transfer price would you recommend for Tops Corporation? b. Using your recommended transfer price, what will be the income of the two divisions, assuming monthly production and sales of 15,000 units? c. The manager of the Manufacturing Division complains about the transfer price, saying that division profits are unfairly low. The two division managers meet and negotiate a transfer price of $345. What will be the income of the two divisions assuming monthly production and sales of 15,000 units.
Exercise 15-34 (Algo) Evaluate Transfer Pricing System: Negotiated Rates (LO 15-2, 3) Tops Corporation is organized into two divisions, Manufacturing and Marketing. Both divisions are considered to be profit centers and the two division managers are evaluated in large part on divisional income. The company makes a single product. It is fabricated in Manufacturing and then packaged and sold in Marketing. There is no intermediate market for the product. The monthly Income statements, in thousands of dollars, for the two divisions follow. Production and sales amounted to 15,000 units. Marketing $15, 000 6,700 $ 8,300 800 Manufacturing $ 4, 500 Revenues Variable costs contribution margin 3, 900 $4 600 Fixed costs 300 Divisional profit 2$ 300 $ 7,500 Assume there is no special order pending. Required: a. What transfer price would you recommend for Tops Corporation? b. Using your recommended transfer price, what will be the income of the two divisions, assuming monthly production and sales of 15,000 units? c. The manager of the Manufacturing Division complains about the transfer price, saying that division profits are unfairly low. The two division managers meet and negotiate a transfer price of $345. What will be the income of the two divisions assuming monthly production and sales of 15,000 units.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:**Exercise 15-34 (Algo) Evaluate Transfer Pricing System: Negotiated Rates (LO 15-2, 3)**
Tops Corporation is organized into two divisions, Manufacturing and Marketing. Both divisions are considered to be profit centers and the two division managers are evaluated in large part on divisional income. The company makes a single product. It is fabricated in Manufacturing and then packaged and sold in Marketing. There is no intermediate market for the product.
The monthly income statements, in thousands of dollars, for the two divisions follow. Production and sales amounted to 15,000 units.
| | Manufacturing | Marketing |
|---------------------|---------------|------------|
| Revenues | $ 4,500 | $15,000 |
| Variable costs | 3,900 | 6,700 |
| Contribution margin | $ 600 | $ 8,300 |
| Fixed costs | 300 | 800 |
| Divisional profit | $ 300 | $ 7,500 |
Assume there is no special order pending.
**Required:**
a. What transfer price would you recommend for Tops Corporation?
b. Using your recommended transfer price, what will be the income of the two divisions, assuming monthly production and sales of 15,000 units?
c. The manager of the Manufacturing Division complains about the transfer price, saying that division profits are unfairly low. The two division managers meet and negotiate a transfer price of $345. What will be the income of the two divisions assuming monthly production and sales of 15,000 units?
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