Chapter 11A - Solution Manual

Chapter 11A - Solution Manual - Chapter 11A Transfer...

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Chapter 11A Transfer Pricing Appendix 11A Transfer Pricing Exercise 11A-1  (20 minutes) 1. The lowest acceptable transfer price from the perspective of the  selling division is given by the following formula: Total contribution margin   on lost sales Variable cost Transfer price  +  per unit Number of units transferred ³ There is no idle capacity, so each of the 20,000 units transferred  from Division X to Division Y reduces sales to outsiders by one  unit. The contribution margin per unit on outside sales is $20 (=  $50 – $30). $20 × 20,000 Transfer price ($30 - $2) +  20,000 = $28 + $20 = $48 ³ The buying division, Division Y, can purchase a similar unit from  an outside supplier for $47. Therefore, Division Y would be  unwilling to pay more than $47 per unit.  £ Transfer price Cost of buying from outside supplier = $47 The requirements of the two divisions are incompatible and no  transfer will take place. 11A-1
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Chapter 11A Transfer Pricing Exercise 11A-1  (continued) 2. In this case, Division X has enough idle capacity to satisfy Division  Y’s demand. Therefore, there are no lost sales and the lowest  acceptable price as far as the selling division is concerned is the  variable cost of $20 per unit. $0 Transfer price $20+ = $20 20,000 ³ The buying division, Division Y, can purchase a similar unit from  an outside supplier for $34. Therefore, Division Y would be  unwilling to pay more than $34 per unit.  £ Transfer price Cost of buying from outside supplier = $34 In this case, the requirements of the two divisions are compatible  and a transfer will hopefully take place at a transfer price within the  range: £ £ $20 Transfer price $34 11A-2
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Chapter 11A Transfer Pricing Exercise 11A-2  (20 minutes) 1. Division A Division B Total  Company Sales. ............................ $3,500,000 1 $2,400,000 2 $5,200,000 3 Expenses: Added by the division. . 2,600,000 1,200,000 3,800,000 Transfer price paid. .....                                     700,000                                 Total expenses. ..............   2,600,000       1,900,000       3,800,000     Net operating income. ... $        900,000     $        500,000     $1,400,000 1 20,000 units × $175 per unit = $3,500,000. 2 4,000 units × $600 per unit = $2,400,000. 3 Division A outside sales (16,000 units × $175 per unit). ... $2,800,000 Division B outside sales (4,000 units × $600 per unit). ....   2,400,000     Total outside sales. .......................................................... $5,200,000 Observe that the $700,000 in intra-company sales has been  eliminated. 2. Division A should transfer the 1,000 additional units to Division B.  Note that Division B’s processing adds $425 to each unit’s selling  price (B’s $600 selling price, less A’s $175 selling price = $425  increase), but it adds only $300 in cost. Therefore, each tube  transferred to Division B ultimately yields $125 more in contribution  margin ($425 – $300 = $125) to the company than can be obtained  from selling to outside customers. Thus, the company as a whole 
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This note was uploaded on 12/14/2011 for the course ACCOUNTING 2301 taught by Professor Sarah during the Fall '10 term at HCCS.

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Chapter 11A - Solution Manual - Chapter 11A Transfer...

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