Required: Consider each of the requirements independently. 1. If Letgo Division desires to achieve it's operating income goal of 20% of sales, what should be the transfer price? 2. Assume that Letgo Division wants to maximize its operating income, what transfer price would you recommend that the Letgo Division negotiate? What is the transfer price that you believe Letgo Division should charge if overall company- operating income is to be maximized? 3.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Nogo Motors, Inc., has several divisions that often purchase component parts from each other. The
company is fully decentralized and each division is selling to other divisions or in outside markets. Each
division makes its decision on where to buy and sell in conformity with divisional goals. Igo Division
purchases most of its airbags from Letgo Division. The managers of these two divisions are currently
negotiating a transfer price for the airbags for next year, when the airbag will be standard equipment on
all Igo vehicles. Letgo Division prepared the following financial information for negotiating purposes:
Costs of airbag as manufactured by Letgo:
Direct materials costs
P 40
55
Direct manufacturing labor costs
Variable manufacturing overhead costs
10
Fixed manufacturing overhead costs
Variable marketing costs
Fixed marketing costs
Fixed administrative costs
Total costs
25
5
15
10
P160
Letgo Division is currently working at 80% of its capacity. Letgo's policy is to achieve an operating
income of 20% of sales.
There has been a drop in price for airbags. The current market price is P 130 per unit.
Required: Consider cach of the requirements independently.
1. If Letgo Division desires to achieve it's operating income goal of 20% of sales, what should be
the transfer price?
2. Assume that Letgo Division wants to maximize its operating income, what transfer price would
you recommend that the Letgo Division negotiate?
3.
What is the transfer price that you believe Letgo Division should charge if overall company-
operating income is to be maximized?
Transcribed Image Text:Nogo Motors, Inc., has several divisions that often purchase component parts from each other. The company is fully decentralized and each division is selling to other divisions or in outside markets. Each division makes its decision on where to buy and sell in conformity with divisional goals. Igo Division purchases most of its airbags from Letgo Division. The managers of these two divisions are currently negotiating a transfer price for the airbags for next year, when the airbag will be standard equipment on all Igo vehicles. Letgo Division prepared the following financial information for negotiating purposes: Costs of airbag as manufactured by Letgo: Direct materials costs P 40 55 Direct manufacturing labor costs Variable manufacturing overhead costs 10 Fixed manufacturing overhead costs Variable marketing costs Fixed marketing costs Fixed administrative costs Total costs 25 5 15 10 P160 Letgo Division is currently working at 80% of its capacity. Letgo's policy is to achieve an operating income of 20% of sales. There has been a drop in price for airbags. The current market price is P 130 per unit. Required: Consider cach of the requirements independently. 1. If Letgo Division desires to achieve it's operating income goal of 20% of sales, what should be the transfer price? 2. Assume that Letgo Division wants to maximize its operating income, what transfer price would you recommend that the Letgo Division negotiate? 3. What is the transfer price that you believe Letgo Division should charge if overall company- operating income is to be maximized?
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