Practice 5:Satellite Products, Inc. owns two subsidiaries, Saturn Systems and Neptune Audio. Saturn supplies printed circuit boards used by Neptune Audio in its state-of-the-art stereo radio. Neptune receives 20,000 boards from Saturn annually. Each radio produced requires a single board. The market price of these boards is $40. Their total variable cost of production is $20. The market price of the radios is $105. The unit variable cost of the radio is $30 excluding the cost of the circuit board. Saturn Systems is currently operating at full capacity of 35,000 boards per year (including those transferred to Neptune Audio). Demand for the boards is strong and all 35,000 could be sold to outside customers. Saturn uses the full market price as the transfer price charged to Neptune Audio. The manager of Neptune Audio argues that Saturn Systems benefits from intercompany transfers because of reduced advertising and other selling costs. Thus, he wants to negotiate a lower transfer price of $35. Calculate the contribution margins for the two subsidiaries using the $40 transfer price. Recalculate the contribution margins at the $35 price suggested by the manager of Neptune Audio. What effect would the change in transfer price have on the company as a whole? Suppose that Neptune Audio operates in a country that imposes a 40% tax rate on corporate income. Saturn Systems is located in a country where the tax rate is only 10%. What would you recommend regarding the transfer price charged by Saturn for the boards transferred to Neptune? Neither of the managers of either Neptune or Saturn will budge. Neptune demands the $35 rate and Saturn says they will sell externally before they cut their transfer price. Both managers are incentivized based on net operating income. You have been called in to mediate. What will you recommend? Practice 5:Satellite Products, Inc. owns two subsidiaries, Satum Systems and Neptune Audio. Satunsupplies printed circuit boards used by Neptune Audio in its state-of-the-art stereo radio.Neptune receives 20,000 boards from Saturn annually. Each radio produced requires a singleboard. The market price of these boards is $40. Their total variable cost of production is $20.The market price of the radios is $105. The unit variable cost of the radio is $30 excludingthe cost of the circuit board.Saturn Systems is currently operating at full capacity of 35,000 boards per year (includingthose transferred to Neptune Audsold to outside customers. Satun uses the full market price as the transfer price charged toNeptune Audio.Demand for the boards is strong and all 35,000 could beThe manager of Neptune Audio argues that Saturn Systems benefits from intercompanytransfers because of reduced advertising and other selling costs. Thus, he wants to negotiate alower transfer price of $35a) Calculate the contribution margins for the two subsidiaries using the $40 transferpriceRecalculate the contribution margins at the $35 price suggested by the manager ofb)Neptune Audio. What effect would the change in transfer price have on the companyas a whole?c)Suppose that Neptune Audio operates in a country that imposes a 40% tax rate oncorporate income. Saturn Systems is located in a country where the tax rate is only10%. What would you recommend regarding the transfer price charged by Satun forthe boards transferred to Neptune?d)Neither of the managers of either Neptune or Satum will budge. Neptune demandsthe $35 rate and Saturn says they will sell extemally before they cut their transferprice. Both managers are incentivized based on net operating income. You havebeen called in to mediate. What will you recommend?

Case 1- Contribution Margin at Transfer Price of $40

Practice 5: Satellite Products, Inc. owns two subsidiaries, Satum Systems and Neptune Audio. Satun supplies printed circuit boards used by Neptune Audio in its state-of-the-art stereo radio. Neptune receives 20,000 boards from Saturn annually. Each radio produced requires a single board. The market price of these boards is $40. Their total variable cost of production is $20. The market price of the radios is $105. The unit variable cost of the radio is $30 excluding the cost of the circuit board. Saturn Systems is currently operating at full capacity of 35,000 boards per year (including those transferred to Neptune Aud sold to outside customers. Satun uses the full market price as the transfer price charged to Neptune Audio. Demand for the boards is strong and all 35,000 could be The manager of Neptune Audio argues that Saturn Systems benefits from intercompany transfers because of reduced advertising and other selling costs. Thus, he wants to negotiate a lower transfer price of $35 a) Calculate the contribution margins for the two subsidiaries using the $40 transfer price Recalculate the contribution margins at the $35 price suggested by the manager of b) Neptune Audio. What effect would the change in transfer price have on the company as a whole? c) Suppose that Neptune Audio operates in a country that imposes a 40% tax rate on corporate income. Saturn Systems is located in a country where the tax rate is only 10%. What would you recommend regarding the transfer price charged by Satun for the boards transferred to Neptune? d) Neither of the managers of either Neptune or Satum will budge. Neptune demands the $35 rate and Saturn says they will sell extemally before they cut their transfer price. Both managers are incentivized based on net operating income. You have been called in to mediate. What will you recommend?

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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Practice 5:

Satellite Products, Inc. owns two subsidiaries, Saturn Systems and Neptune Audio. Saturn supplies printed circuit boards used by Neptune Audio in its state-of-the-art stereo radio. Neptune receives 20,000 boards from Saturn annually. Each radio produced requires a single board. The market price of these boards is $40. Their total variable cost of production is $20. The market price of the radios is $105. The unit variable cost of the radio is $30 excluding the cost of the circuit board.

Saturn Systems is currently operating at full capacity of 35,000 boards per year (including those transferred to Neptune Audio). Demand for the boards is strong and all 35,000 could be sold to outside customers. Saturn uses the full market price as the transfer price charged to Neptune Audio.

The manager of Neptune Audio argues that Saturn Systems benefits from intercompany transfers because of reduced advertising and other selling costs. Thus, he wants to negotiate a lower transfer price of $35.

Calculate the contribution margins for the two subsidiaries using the $40 transfer price.

Recalculate the contribution margins at the $35 price suggested by the manager of Neptune Audio. What effect would the change in transfer price have on the company as a whole?

Suppose that Neptune Audio operates in a country that imposes a 40% tax rate on corporate income. Saturn Systems is located in a country where the tax rate is only 10%. What would you recommend regarding the transfer price charged by Saturn for the boards transferred to Neptune?

Neither of the managers of either Neptune or Saturn will budge. Neptune demands the $35 rate and Saturn says they will sell externally before they cut their transfer price. Both managers are incentivized based on net operating income. You have been called in to mediate. What will you recommend?

Practice 5:
Satellite Products, Inc. owns two subsidiaries, Satum Systems and Neptune Audio. Satun
supplies printed circuit boards used by Neptune Audio in its state-of-the-art stereo radio.
Neptune receives 20,000 boards from Saturn annually. Each radio produced requires a single
board. The market price of these boards is $40. Their total variable cost of production is $20.
The market price of the radios is $105. The unit variable cost of the radio is $30 excluding
the cost of the circuit board.
Saturn Systems is currently operating at full capacity of 35,000 boards per year (including
those transferred to Neptune Aud
sold to outside customers. Satun uses the full market price as the transfer price charged to
Neptune Audio.
Demand for the boards is strong and all 35,000 could be
The manager of Neptune Audio argues that Saturn Systems benefits from intercompany
transfers because of reduced advertising and other selling costs. Thus, he wants to negotiate a
lower transfer price of $35
a) Calculate the contribution margins for the two subsidiaries using the $40 transfer
price
Recalculate the contribution margins at the $35 price suggested by the manager of
b)
Neptune Audio. What effect would the change in transfer price have on the company
as a whole?
c)
Suppose that Neptune Audio operates in a country that imposes a 40% tax rate on
corporate income. Saturn Systems is located in a country where the tax rate is only
10%. What would you recommend regarding the transfer price charged by Satun for
the boards transferred to Neptune?
d)
Neither of the managers of either Neptune or Satum will budge. Neptune demands
the $35 rate and Saturn says they will sell extemally before they cut their transfer
price. Both managers are incentivized based on net operating income. You have
been called in to mediate. What will you recommend?

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