solve a and b based on data in the images provided.a.What are the minimum and maximum transfer prices for the 12,300 batteries needed in the next 6 months that would be acceptable to the Battery and the Auto Divisions? Why are these the minimum and maximum prices?b.What is the projected total operating income for AMP Industries for the next six months if the internal transfer of the 12,300 batteries takes place at $11,280 per unit? What is AMP Industries’ projected total operating income if the internal transfer does not take place? Assume there is no external market for the batteries produced by the Battery Division. Transfer Pricing CaseAMP Industries is a multi-national firm built around batteries and the use of batteries in theautomotive industry. AMP Industries is made up of two divisions, a Battery division thatmanufactures batteries and an Auto division that uses batteries from the Battery division to makea line of fully electric cars. Currently both divisions only transact internally - the Batterydivision sells only to the Auto division and the Auto division purchases all of their requiredbatteries from the Battery division. The firm allows each division manager to make decisionsthat are best for their division with a minimum of interference from top-level corporatemanagement.The Battery division is located in Canada while the Auto division is located in the United States.Because the Battery division is located in Canada, the Auto division will need to pay a 10% tariffon top of whatever transfer price is paid to the Battery division (the Auto division will need tomake the tariff payment to the US government). The Battery Division is subject to a 15%corporate income tax on their operating profits since they are based in Canada while the Autodivision is subject to a 21% corporate income tax on their operating profits since they are basedin the US.The transfer price between divisions had been $8,900 per unit until June of 2020 when Olivia,manager of the Battery division informed the manager of the Auto division that the price wouldgo up to $11,280 per unit starting in July 2020. Olivia has made this proposed change in thetransfer price because she has recently made significant investments in new equipment in herdivision and after making these investments and carefully tracking her division's total cost overthe last 6 months, she believes a significant increase in the transfer price is warranted. In hercalculation of the new proposed transfer price Olivia has built in what she believes is areasonable 20% profit margin for her division. Olivia's calculation of the new proposed transferprice is based on the following information for her division over the last 6 months in which herdivision produced and sold 11,500 units to the Auto division:Battery Division Costs (based on prod of 11,500 batteries)Direct Materials$35,407,235$27,945,345$14,592,925$22,212,710Direct LaborVariable OverheadFixed OverheadVariable SG&A costs$2,511,715$1,106,070$103,776,000Fixed SG&A costsTotal costsThe fixed overhead cost for the Battery division represents the costs of the facility andequipment. If the Battery division is shut down, AMP Industries estimates that 30% of this fixedoverhead would be eliminated but the remaining 70% could not be eliminated. The variable SG&A costs for the Battery Division represent the costs of shipping the batteries tothe Auto division in the US. The fixed SG& A costs for the Battery division represent cancelablelease expenses.Ellis, the manager of the Auto division is concerned with the proposed new transfer price. Ellishas put together the following information for the costs for his division other than battery costsfor the last 6 months (these costs do not include any costs for the batteries including any relevanttariffs).Auto Division Costs (based on prod of 11,500 cars)Direct Materials$65,521,365$116,418,180$38,406,665$25,281,255Direct LaborVariable OverheadFixed OverheadVariable SG&A costsFixed SG&A costsTotal costs$17,673,545$41,448,990$304,750,000Because the average price per car sold by the Auto division is $38,500, Ellis is concerned thatthe new transfer price for the battery will cause his division to have negative operating income.The Auto division believes they can produce and sell 12,300 cars over the next 6 months so theyare projecting a need for 12,300 batteries over that time period. The Auto division expects to beable to sell these 12,300 cars at their typical sales price of $38,500 per car.Because of the proposed increase in the transfer price for the internally produced battery, Ellishas asked for a bid from a possible alternative battery supplier that is known to produce highquality batteries. He received a quote for a comparable battery from the external supplier for$9,200 per unit. The external supplier is located in Mexico and therefore any batteries purchasedfrom this external supplier will be subject to a 15% tariff (as always, the tariff will need to bepaid by the Auto division to the US government).

AMP industries has two divisions. 1. Battery division 2. Auto division Battery division is in Canada…

Answered: solve a and b based on data in the…

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q