P6-2 Transfer pricing: buy outside versus internal transfer Ajax Division of Delta Corporation produces electric motors, 20% of which are sold to Flash Division of Delta and the remainder to outside customers. Delta treats its divisions as profit centres and allows division managers to choose their sources of sale and supply. Corporate policy requires that all interdivisional sales and purchases be recorded at variable cost as a transfer price. Ajax Division's estimated sales and standard cost data for the coming year based on the full capacity of 100 000 units are as follows: Sales Variable costs Fixed costs Profit Unit sales To Flash To Outsiders $8,000,000 -3,600,000 -300,000 -1,200,000 -$300,000 $3,200,000 20,000 80,000 $900,000 -900,000 Ajax has an opportunity to sell the 20 000 units to an outside customer (instead of to flash Division) at a price of $75 per unit on a continuing basis in the coming year. Flash can purchase its requirement of 20 000 motors from an outside supplier at a price of $85 per unit. Required: (a) Assuming that Ajax Division desires to maximise its gross profit, should Ajax take on the new customer and drop its sales to flash for the coming year, and why?

P6-2 Transfer pricing: buy outside versus internal transfer Ajax Division of Delta Corporation produces electric motors, 20% of which are sold to Flash Division of Delta and the remainder to outside customers. Delta treats its divisions as profit centres and allows division managers to choose their sources of sale and supply. Corporate policy requires that all interdivisional sales and purchases be recorded at variable cost as a transfer price. Ajax Division's estimated sales and standard cost data for the coming year based on the full capacity of 100 000 units are as follows: Sales Variable costs Fixed costs Profit Unit sales To Flash To Outsiders $8,000,000 -3,600,000 -300,000 -1,200,000 -$300,000 $3,200,000 20,000 80,000 $900,000 -900,000 Ajax has an opportunity to sell the 20 000 units to an outside customer (instead of to flash Division) at a price of $75 per unit on a continuing basis in the coming year. Flash can purchase its requirement of 20 000 motors from an outside supplier at a price of $85 per unit. Required: (a) Assuming that Ajax Division desires to maximise its gross profit, should Ajax take on the new customer and drop its sales to flash for the coming year, and why?

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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D1.
Transfer Pricing Exoplex Industries Inc. is a diversified aerospace company, including two operating divisions, Semiconductors and Navigational Systems. Condensed divisional income statements, which involve no intracompany transfers and include a breakdown of expenses into variable and fixed components, are as follows: Exoplex Industries Inc.Divisional Income StatementsFor the Year Ended December 31, 20Y8 SemiconductorsDivision NavigationalSystemsDivision Total Sales: 2,240 units × $396 per unit $887,040 $887,040 3,675 units × $590 per unit $2,168,250 2,168,250 Total sales $887,040 $2,168,250 $3,055,290 Expenses: Variable: 2,240 units × $232 per unit $519,680 $519,680 3,675 units × $472* per unit $1,734,600 1,734,600 Fixed 220,000 325,000 545,000 Total expenses $739,680 $2,059,600 $2,799,280 Income from operations $147,360 $108,650 $256,010…
Selected operating data for two divisions of Outback Brewing, Ltd., of Australia are given below: Division Queensland New South Wales Sales $ 855,000 $ 2,200,000 Average operating assets $ 570,000 $ 550,000 Net operating income $ 44,460 $ 48,400 Property, plant, and equipment (net) $ 244,000 $ 194,000 Required: 1. Compute the rate of return for each division using the return on investment (ROI) formula stated in terms of margin and turnover. 2. Which divisional manager seems to be doing the better job?
Buckley Company operates three segments. Income statements for the segments imply that profitability could be improved if Segment A were eliminated. BUCKLEY COMPANY Income Statements for Year 2 Segment A B C Sales $ 330,000 $ 480,000 $ 500,000 Cost of goods sold (242,000 ) (184,000 ) (190,000 ) Sales commissions (30,000 ) (44,000 ) (44,000 ) Contribution margin 58,000 252,000 266,000 General fixed operating expenses (allocation of president’s salary) (92,000 ) (92,000 ) (92,000 ) Advertising expense (specific to individual divisions) (6,000 ) (20,000 ) 0 Net income (loss) $ (40,000 ) $ 140,000 $ 174,000 Required Prepare a schedule of relevant sales and costs for Segment A. Prepare comparative income statements for the company as a whole under two alternatives: (1) the retention of Segment A and (2) the elimination of Segment A. Options for required A table are: Advertising…
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. Revenues Variable costs Contribution margin Fixed costs Manufacturing $4,500 3,900 $. Marketing $15, 000 6,700 $ 8,300 600 300 800 Divisional profit $. 300 $ 7,500 Assume there is no speclal 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…
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4. If a transfer price of $340 per unit is negotiated, how much would the income from operations of each division and total company income from operations increase? The Semiconductors Division's income from operations would increase by$fill in the blank 75932002afef041_1 The Navigational Systems Division's income from operations would increase by$fill in the blank 75932002afef041_2 Exoplex Industries Inc.'s total income from operations would increase by$fill in the blank 75932002afef041_3 5a. What is the range of possible negotiated transfer prices that would be acceptable for Exoplex Industries Inc.? Any transfer price than the Semiconductors Division’s variable expenses per unit but than the market price would be acceptable. 5b. Assuming that the managers of the two divisions cannot agree on a transfer price, what price would you suggest as the transfer price?$fill in the blank 75932002afef041_6
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