1A-C In each of the cases below, assume Division X has a product that can be sold either to outsidecustomers or to Division Y of the same company for use in its production process. The managers ofthe divisions are evaluated based on their divisional profits.CaseABDivision X:Capacity in unitsNumber of units being sold to outside customers101,000101,000$2$93,00071,000Selling price per unit to outside customersVariable costs per unitFixed costs per unit (based on capacity)54 $28 $29148.4.Division Y:Number of units needed for productionPurchase price per unit now being paidto an outside supplier22,00022,000$50 $28Required:1. Refer to the data in case A above. Assume in this case that $2 per unit in variable selling costs can be avoided onintracompany sales.a. What is the lowest acceptable transfer price from the perspective of the selling division?b. What is the highest acceptable transfer price from the perspective of the buying division?c. What is the range of acceptable transfer prices (if any) between the two divisions? If the managers are free tonegotiate and make decisions on their own, will a transfer probably take place?

Transfer price: Transfer price is the price that one division of a company will pay to another…

In each of the cases below, assume Division X has a product that can be s customers or to Division Y of the same company for use in its production p the divisions are evaluated based on their divisional profits. Division X: Capacity in units Number of units being sold to outside customers Selling price per unit to outside customers Variable costs per unit Fixed costs per unit (based on capacity) Division Y: 101,00 101,000 28 Number of units needed for production Purchase price per unit now being paid 22,000

In each of the cases below, assume Division X has a product that can be s customers or to Division Y of the same company for use in its production p the divisions are evaluated based on their divisional profits. Division X: Capacity in units Number of units being sold to outside customers Selling price per unit to outside customers Variable costs per unit Fixed costs per unit (based on capacity) Division Y: 101,00 101,000 28 Number of units needed for production Purchase price per unit now being paid 22,000

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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Concept explainers

Capital Gain

Any capital asset when sold can give the seller a higher or lower price from its purchase price leading to a capital gain or capital loss. The time period of holding an asset is decided based on if it is a long term or short-term capital gain. On that basis, the rate of taxation is decided if it is 20%, 15% or according to the tax brackets. The rate of taxation differs in the case of equity or debt, whether long or short term. The capital gain can be adjusted from capital loss to arrive at a net capital gain. The amount of gains and the exemption has to be reported in the tax return filed in the financial year in which the asset was transferred. The tax return can be filed quarterly, monthly, semi-annually or annually.

Question

1A-C

In each of the cases below, assume Division X has a product that can be sold either to outside
customers or to Division Y of the same company for use in its production process. The managers of
the divisions are evaluated based on their divisional profits.
Case
A
B
Division X:
Capacity in units
Number of units being sold to outside customers
101,000
101,000
$
2$
93,000
71,000
Selling price per unit to outside customers
Variable costs per unit
Fixed costs per unit (based on capacity)
54 $
28 $
29
14
8.
4.
Division Y:
Number of units needed for production
Purchase price per unit now being paid
to an outside supplier
22,000
22,000
$
50 $
28
Required:
1. Refer to the data in case A above. Assume in this case that $2 per unit in variable selling costs can be avoided on
intracompany sales.
a. What is the lowest acceptable transfer price from the perspective of the selling division?
b. What is the highest acceptable transfer price from the perspective of the buying division?
c. What is the range of acceptable transfer prices (if any) between the two divisions? If the managers are free to
negotiate and make decisions on their own, will a transfer probably take place?

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