2 Exercise 11A-2 Transfer Pricing from the Viewpoint of the Entire Company [LO11

ID: 2593319 • Letter: 2

Question

2 Exercise 11A-2 Transfer Pricing from the Viewpoint of the Entire Company [LO11-5) 0 oints Division A manufactures electronic circuit boards. The boards can be sold either to Division B of the same company or to outside customers. Last year, the following activity occurred in Division A: Selling price per eircuit board $ 193 Variable cost per circuit board 126 Number of cireuit boards: Produced during the year Sold to outside customers Sold to Division B 21,900 14,000 7.900 Sales to Division 8 were at the same price as sales to outside customers. The circuit boards purchased by Division B were used in an Hint electronic instrument manufactured by that division (one board per instrument). Division B incurred $280 in additional variable cost per instrument and then sold the instruments for $610 each. 1. Prepare income statements for Division A, Division B, and the company as a whole. Required: 2. Assume Division A's manufacturing capacity is 21,900 circuit boards. Next year, Division B wants to purchase 8,900 circuit boards Print from Division A rather than 7,900. (Circuit boards of this type are not available from outside sources.) From the standpoint of the References company as a whole, should Division A sell the additional 1,000 circuit boards to Division B or continue to sell them to outside customers? Complete this question by entering your answers in the tabs below Required 1Required 2 Prepare income statements for Division A, Division B, and the company as a whole. A Division B Total Sales

Explanation / Answer

Division A

Division B

Total Company

Sales

4226700*1

4819000*2

7521000*3

Expenses:

Added by the division

2759400*4

2212000*5

4971400*7

Transfer Price Paid

1524700*6

Total Expenses

2759400

3736700

4971400

Net Operating Income

1467300

1082300

2549600

Explanation:

* 1 21900 units x 193 per unit = 4226700

* 2 7900 units x 610 per unit = 4819000

* 3 Division A outside sales (14000 units x 193 per unit) = 2702000

Division B outside sales (7900 units x 610 per unit) = 4819000

Total outside sales = 7521000

Added by the division:

*4 21900 x 126= 2759400

*5 7900 x 280 =2212000

*6 7900 x 193 =1524700

*7 2759400 + 2212000 = 4971400