a.
Ascertain the operating profit before tax for each division using the market transfer price of $150.
a.
Explanation of Solution
Ascertain the operating profit before tax for each division using the market transfer price of $150 as follows:
Entire Company |
Green Division |
White Division | |
Sales | $525,000 | $300,000 | $450,000 |
Variable Costs | 242,500 | 130,000 | 337,500 |
Contribution Margin | $282,500 | $170,000 | $112,500 |
Fixed Costs | 157,500 | 100,000 | 57,500 |
Operating Profit | $125,000 | $70,000 | $55,000 |
Table (1)
Calculate the sales of Green division.
Sales=Number of units×Market price=2,000 units×$150=$300,000
Calculate the sales of White division.
Sales=Number of units×Market price=1,500 units×$300=$450,000
Calculate the sales of Entire Company.
Sales=[(Number of Green division units−Number of White division units)×(Market price of greendivision)+(Number of units of White division×Market price of White division)]=(2,000−1,500)×(150)+(1,500 ×$300)=$525,000
Calculate the variable cost of Green division.
Variable cost=Number of units×Variable cost per unit=2,000 units×$65=$130,000
Calculate the variable cost of White division.
Variable cost=Number of units×(Transfer price+Variable cost)=1,500 units×($150+$75)=$337,500
Calculate the variable cost of Entire Company.
Variable cost=[(Number of Green division units×Variable cost of Green division)+(Number of White division units×Variable cost of White division)]=(2,000×$65)+(1,500 ×$75)=$242,500
b.
Ascertain the operating profit before tax for each division using the transfer price of $135, as suggested by the manager of the white division.
b.
Explanation of Solution
Ascertain the operating profit before tax for each division using the transfer price of $135, as suggested by the manager of the white division as follows:
Entire Company |
Green Division |
White Division | |
Sales | $525,000 | $277,500 | $450,000 |
Variable Costs | 242,500 | 130,000 | 315,000 |
Contribution Margin | $282,500 | $147,500 | $135,000 |
Fixed Costs | 157,500 | 100,000 | 57,500 |
Operating Profit | $125,000 | $47,500 | $77,500 |
Table (2)
Calculate the sales of Green division.
Sales cost=[(Number of Green division units transferred×Transfer price)+(Number of units sold to market×Market price)]=(1,500×$135)+(500 ×$150)=$277,500
Calculate the sales of White division.
Sales=Number of units×Market price=1,500 units×$300=$450,000
Calculate the variable cost of Green division.
Variable cost=Number of units×Variable cost per unit=2,000 units×$65=$130,000
Calculate the variable cost of White division.
Variable cost=Number of units×(Negotiated transfer price+Variable cost)=1,500 units×($135+$75)=$315,000
c.
Discuss the manner in which the company’s net income affected under the two transfer pricing scenarios.
c.
Explanation of Solution
Discuss the manner in which the company’s net income affected under the two transfer pricing scenarios as follows:
Accounting entries that show the flow of goods between the departments are generated by the transfer prices. One department records the transfer price as revenue while on the other hand, the same is treated as an expense by the other department. These entries of revenue and expense are cancelled out for the entire company and hence, internal transfer prices do not have a direct effect on the net income of the company.
d.
Discuss whether it would be more beneficial to the company if the green division sold trophy bases externally and the white division purchased trophy bases from an outside supplier.
d.
Explanation of Solution
Calculate the pre-tax operating profit, using the external sale price and purchase price for the trophy base as follows:
Entire Company |
Green Division |
White Division | |
Sales | $750,000 | $300,000 | $450,000 |
Variable Costs | 482,500 | 130,000 | 352,500 |
Contribution Margin | $267,500 | $170,000 | $97,500 |
Fixed Costs | 157,500 | 100,000 | 57,500 |
Operating Profit | $110,000 | $70,000 | $40,000 |
Table (3)
Calculate the sales of Green division.
Sales=Number of units×Market price=2,000 units×$150=$300,000
Calculate the sales of White division.
Sales=Number of units×Market price=1,500 units×$300=$450,000
Calculate the variable cost of Green division.
Variable cost=Number of units×Variable cost per unit=2,000 units×$65=$130,000
Calculate the variable cost of White division.
Variable cost=Number of units×(Purchase price from outside supplier+Variable cost)=1,500 units×($160+$75)=$352,500
The company earns $15,000 more in operating profit if the White division purchases the trophy base from the Green division and hence, as a whole it is more beneficial to the company.
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Chapter 22 Solutions
Financial Accounting
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