Birrell Scientific Inc. manufactures electronic products, withtwo operating divisions, the GPS Systems and Communication Systemsdivisions. Condensed divisional income statements, which involve nointracompany transfers and which include a breakdown of expensesinto variable and fixed components, are as follows:
Birrell Scientific Inc.
Divisional Income Statements
For the Year Ended December 31, 20Y5 |
|
GPS Systems
Division | Communication
Systems Division |
Total |
| Sales: | | | | | | | | | |
| 85,000 units @ $60 per unit | $5,100,000 | | | | | | $5,100,000 | | |
| 155,000 units @ $115 per unit | | | | $17,825,000 | | | 17,825,000 | | |
| $5,100,000 | | | $17,825,000 | | | $22,925,000 | | |
| Expenses: | | | | | | | | | |
| Variable: | | | | | | | | | |
| 85,000 units @ $41 per unit | $(3,485,000) | | | | | | $(3,485,000) | | |
| 155,000 units @ $90 per unit* | | | | $(13,950,000) | | | (13,950,000) | | |
| Fixed | 250,000 | | | (600,000) | | | (850,000) | | |
| Total expenses | $(3,735,000) | | | $(14,550,000) | | | $(18,285,000) | | |
| Operating income | $1,365,000 | | | $3,275,000 | | | $4,640,000 | | |
*$60 of the $90 per unit represents materials costs, and theremaining $30 per unit represents other variable conversionexpenses incurred within the Communication Systems Division.
The GPS Systems Division is presently producing 85,000 units outof a total capacity of 150,000 units. Materials used in producingthe Communication Systems Division's product are currentlypurchased from outside suppliers at a price of $60 per unit. TheGPS Systems Division is able to produce the materials used by theCommunication Systems Division at a variable cost of $41 per unit.Except for the possible transfer of materials between divisions, nochanges are expected in sales and expenses.
Required:
1. Would the market price of $60 per unit be anappropriate transfer price for Birrell Scientific Inc.?
No
2. If the Communication Systems Divisionpurchases 25,000 units from the GPS Systems Division, rather thanexternally, at a negotiated transfer price of $52 per unit, howmuch would the operating income of each division and the totalcompany operating income increase?
The GPS Systems Division's operating income would increaseby
$
The Communication Systems Division's operating income wouldincrease by
$
Birrell Scientific Inc.'s total operating income would increaseby
$
Feedback
Review how transfer pricing functions.
2. Multiply the units transferred by the difference between thetransfer price (supplying company) or the market price (purchasingcompany) and the variable cost per unit.
3. Prepare condensed divisional incomestatements for Birrell Scientific Inc. based on the data in part(2).
| Birrell Scientific, Inc. |
| Divisional Income Statements |
| For the Year Ended December 31, 20Y5 |
| GPS Division | Communication Division | Total |
| Sales: | | | |
| 85,000 units | $ | | $ |
| 25,000 units | | | |
| 155,000 units | | $ | |
| $ | $ | $ |
| Expenses: | | | |
| Variable: | | | |
| 110,000 units | $ | | $ |
| 25,000 units | | $ | |
| 130,000 units | | | |
| Fixed | | | |
| Total expenses | $ | $ | $ |
| Operating income | $ | $ | $ |
Feedback
3. Keep in mind, 25,000 units are transferred in at $52 per unitplus $38 in other variable conversion expenses incurred within thedivision.
4. If a transfer price of $49 per unit isnegotiated, how much would the operating income of each divisionand the total company operating income increase?
The GPS Systems Division’s operating income would increaseby
$
The Communication Systems Division's operating income wouldincrease by
$
Birrell Scientific Scientific Inc.'s total operating incomewould increase by
$
5a. What is the range of possible negotiatedtransfer prices that would be acceptable for Birrell ScientificInc.?
Between $ and $
5b. Assuming that the managers of the twodivisions cannot agree on a transfer price, what transfer pricewould represent the best compromise? If required, round your answerto the nearest dollar.
$51
