Dual Transfer Pricing The Athens Company has two divisions, Alpha and Delta. Del

Question

Dual Transfer Pricing

The Athens Company has two divisions, Alpha and Delta. Delta Division produces a product at a variable cost of $7 per unit, and sells 150,000 units to outside customers at $12 per unit and 40,000 units to Alpha Division at variable cost plus 40 percent. Under the dual transfer price system, Alpha Division pays only the variable cost per unit. Delta Division's fixed costs are $275,000 per year. Alpha Division sells its finished product to outside customers at $25 per unit. Alpha has variable costs of $5 per unit, in addition to the costs from Delta Division. Alpha Division's annual fixed costs are $180,000. There are no beginning or ending inventories.

(a) Prepare the income statements for the two divisions and the company as a whole.

Do not enter any answer as negative numbers.

(b) When preparing divisional income statements for a two-division company where one division sells some product internally to the other division, the sum of the net incomes of the two divisions will always equal the total net income of the company.

True

False

Athens Company Divisional
Income Statement Alpha Delta Company Sales: External $Answer $Answer $Answer Internal Answer Answer Answer Total Answer Answer Answer Variable costs: Incurred Answer Answer Answer Transferred in Answer Answer Answer Total Answer Answer Answer Contribution margin Answer Answer Answer Fixed costs Answer Answer Answer Net income $Answer $Answer $Answer

Explanation / Answer

A) Athens Company Divisional

Income Statement

B) True

The sum of the net incomes of the two divisios will always equal the total net income of the company because internal transfer can not change the overall income of the company, it is only change of income of internal division.

A) Athens Company Divisional

Income Statement

Alpha Delta Company Sales External $1,000,000 $1,800,000 $2,800,000 Internal $0 $392,000 $392,000 Total $1,000,000 $2,192,000 $3,192,000 Variable cost Incurred $200,000 $1,330,000 $1,530,000 Transferred in $392,000 $0 $392,000 Total $592,000 $1,330,000 $1,922,000 Contribution margin $408,000 $862,000 $1,270,000 Fixed Costs $180,000 $275,000 $455,000 Net Profit $228,000 $587,000 $815,000

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