Nogo Motors, Inc., has several divisions that often purchase component parts from each other. Thecompany is fully decentralized and each division is selling to other divisions or in outside markets. Eachdivision makes its decision on where to buy and sell in conformity with divisional goals. Igo Divisionpurchases most of its airbags from Letgo Division. The managers of these two divisions are currentlynegotiating a transfer price for the airbags for next year, when the airbag will be standard equipment onall Igo vehicles. Letgo Division prepared the following financial information for negotiating purposes:Costs of airbag as manufactured by Letgo:Direct materials costsP 4055Direct manufacturing labor costsVariable manufacturing overhead costs10Fixed manufacturing overhead costsVariable marketing costsFixed marketing costsFixed administrative costsTotal costs2551510P160Letgo Division is currently working at 80% of its capacity. Letgo's policy is to achieve an operatingincome 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 bethe transfer price?2. Assume that Letgo Division wants to maximize its operating income, what transfer price wouldyou 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?

Requirement 1 Transfer Price = Total cost + Operating margin @20% on transfer priceTransfer Price =…

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.

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

Section: Chapter Questions

Problem 1Q

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