22and24_AdditionalStudyQuestions

22and24_AdditionalStudyQuestions - ACC 333 (Farrell)...

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ACC 333 (Farrell) Classes 22 & 24 Fall 2011 Page 1 of 6 Additional Study Questions Transfer Pricing 1. Explain the problem(s) that transfer pricing tries to mitigate. Illustrate and discuss the tradeoffs involved. 2. ABC Electric manufactures electrical equipment in two plants: Purcell and Lexington. The Purcell plant manufactures a small electric motor. They have the capacity to produce 100,000 units per year. Demand recently has been steady at 80,000 units per year, resulting in a nice profit. Their most recent financial statement reveals the following: Sales (80,000 units @ $24 per unit) $1,920,000 Variable manufacturing costs 1,280,000 Fixed manufacturing costs 300,000 Fixed selling and administrative costs 200,000 Net income $ 140,000 The Lexington plant is considering adding a window fan to its product line. It would sell for $35. Variable costs (not including a motor) would be $8 and fixed costs associated with the product would be $200,000. Management of the Lexington plant estimated that they will be able to sell 50,000 per year. Required: (a) The Lexington plant can also obtain an adequate motor for $20 from a nonaffiliated supplier. For ABC Electric s best interests, how many units should Lexington obtain from each source (internal / external), and at what price? (b) To obtain the $20 price from the outside vendor, Lexington must purchase all 50,000 units from the supplier. Should Purcell match the price and sell 50,000 motors to Lexington at $20 each? Show calculations.
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ACC 333 (Farrell) Classes 22 & 24 Fall 2011 Page 2 of 6 3. Carlyle Corporation is comprised of two divisions, Ajax and Bradley. Ajax Division produces electric motors, 20 percent of which are sold to Bradley Division. The remaining motors are sold to outside customers. Carlyle treats its divisions as profit centers and allows division managers to choose their sources of sale and supply. Corporate policy requires that all interdivisional sales and purchases be recorded at variable cost as a transfer price. Ajax Division's estimated sales and standard-cost data for the year, based on capacity of 100,000 units, are as follows: Bradley Outsiders Sales $ 900,000 $ 8,000,000 Variable costs (900,000) (3,600,000) Fixed costs (300,000) (1,200,000) Gross margin $(300,000) $ 3,200,000 Unit sales 20,000 80,000 Ajax has an opportunity to sell the 20,000 units shown above to an outside customer at a price of $75 per unit. Bradley would be able to purchase its requirements from an outside supplier at a price of $85 per unit. Required: (a) Assuming that Ajax Division desires to maximize its gross margin, would Ajax take on the new customer and drop its sales to Bradley? Why? Would this be in the best interest of Carlyle Corporation? Why? (b)
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22and24_AdditionalStudyQuestions - ACC 333 (Farrell)...

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