Transfer pricing, full cost and market-based transfer prices. Compost Systems, Inc. (CSI) operates a composting service business and produces organic fertilizer that it sells to farmers in the Midwest. CSI operates with two divisions, collection and composting. The collection division contracts with universities, hospitals, and other large institutions to provide compostable waste collection bins in their dining service areas, and hauls the waste away daily. The waste providers pay the collection divi- sion a monthly fee for this service, and the collection division in turn charges the composting division for the compostable materials at a full-cost transfer price of $200 per ton. Monthly, CSI collects and trans- fers 1,000 tons of waste. The composting division processes the waste, places it in bins, adds microbes to break down the or- ganic material, and ultimately delivers the fertilizer it produces to farmers for use in their fields. After the re- moval of water, 1,000 tons of waste produces 500 tons of fertilizer. Demand for the fertilizer has risen steeply as consumer demand for organic produce has increased in recent years. Below are key data related to CSI's monthly operations: Collection Division Revenues: $ 50,000 200,000 $250,000 Revenues from waste providers (monthly fees) Revenues from transfer of materials to composting division, 1,000 tons x $200/ton Total revenues Costs: Variable costs, 1,000 tons x $150/ton $150,000 Fixed costs 50,000 200,000 $ 50,000 Total costs Divisional operating income Composting Division Revenues, 500 tons x $550/ton $275,000 Costs: Transfer price of compostable materials, 1,000 tons x $200/ton Other variable costs, 500 tons x $50/ton $200,000 25,000 20,000 245,000 30,000 Fixed costs Total costs Divisional operating income Operating income of both divisions together $ 80,000 The composting division has demand for an additional 200 tons of fertilizer per month. To provide the 400 tons of compostable waste necessary to meet the increased demand, the collection division will have to invest in additional marketing and equipment that will increase monthly fixed costs by $28,000. Estimated additional monthly revenue to the collection division from waste providers is $10,000.
Transfer pricing, full cost and market-based transfer prices. Compost Systems, Inc. (CSI) operates a composting service business and produces organic fertilizer that it sells to farmers in the Midwest. CSI operates with two divisions, collection and composting. The collection division contracts with universities, hospitals, and other large institutions to provide compostable waste collection bins in their dining service areas, and hauls the waste away daily. The waste providers pay the collection divi- sion a monthly fee for this service, and the collection division in turn charges the composting division for the compostable materials at a full-cost transfer price of $200 per ton. Monthly, CSI collects and trans- fers 1,000 tons of waste. The composting division processes the waste, places it in bins, adds microbes to break down the or- ganic material, and ultimately delivers the fertilizer it produces to farmers for use in their fields. After the re- moval of water, 1,000 tons of waste produces 500 tons of fertilizer. Demand for the fertilizer has risen steeply as consumer demand for organic produce has increased in recent years. Below are key data related to CSI's monthly operations: Collection Division Revenues: $ 50,000 200,000 $250,000 Revenues from waste providers (monthly fees) Revenues from transfer of materials to composting division, 1,000 tons x $200/ton Total revenues Costs: Variable costs, 1,000 tons x $150/ton $150,000 Fixed costs 50,000 200,000 $ 50,000 Total costs Divisional operating income Composting Division Revenues, 500 tons x $550/ton $275,000 Costs: Transfer price of compostable materials, 1,000 tons x $200/ton Other variable costs, 500 tons x $50/ton $200,000 25,000 20,000 245,000 30,000 Fixed costs Total costs Divisional operating income Operating income of both divisions together $ 80,000 The composting division has demand for an additional 200 tons of fertilizer per month. To provide the 400 tons of compostable waste necessary to meet the increased demand, the collection division will have to invest in additional marketing and equipment that will increase monthly fixed costs by $28,000. Estimated additional monthly revenue to the collection division from waste providers is $10,000.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
What difficulties do you see in using a full-cost transfer-pricing system in the future?
Transcribed Image Text:Transfer pricing, full cost and market-based transfer prices. Compost Systems, Inc. (CSI)
operates a composting service business and produces organic fertilizer that it sells to farmers in the
Midwest. CSI operates with two divisions, collection and composting. The collection division contracts
with universities, hospitals, and other large institutions to provide compostable waste collection bins in
their dining service areas, and hauls the waste away daily. The waste providers pay the collection divi-
sion a monthly fee for this service, and the collection division in turn charges the composting division for
the compostable materials at a full-cost transfer price of $200 per ton. Monthly, CSI collects and trans-
fers 1,000 tons of waste.
The composting division processes the waste, places it in bins, adds microbes to break down the or-
ganic material, and ultimately delivers the fertilizer it produces to farmers for use in their fields. After the re-
moval of water, 1,000 tons of waste produces 500 tons of fertilizer. Demand for the fertilizer has risen steeply
as consumer demand for organic produce has increased in recent years.
Below are key data related to CSI's monthly operations:
Collection Division
Revenues:
$ 50,000
200,000
$250,000
Revenues from waste providers (monthly fees)
Revenues from transfer of materials to composting division, 1,000 tons x $200/ton
Total revenues
Costs:
Variable costs, 1,000 tons x $150/ton
$150,000
Fixed costs
50,000
200,000
$ 50,000
Total costs
Divisional operating income
Composting Division
Revenues, 500 tons x $550/ton
$275,000
Costs:
Transfer price of compostable materials, 1,000 tons x $200/ton
Other variable costs, 500 tons x $50/ton
$200,000
25,000
20,000
245,000
30,000
Fixed costs
Total costs
Divisional operating income
Operating income of both divisions together
$ 80,000
The composting division has demand for an additional 200 tons of fertilizer per month. To provide the
400 tons of compostable waste necessary to meet the increased demand, the collection division will have
to invest in additional marketing and equipment that will increase monthly fixed costs by $28,000. Estimated
additional monthly revenue to the collection division from waste providers is $10,000.
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