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Garcon Inc. manufactures electronic products, with two operating divisions, Consumer and Commercial. Condensed divisional income statements, which involve no intracompany transfers and which include a breakdown of expenses into variable and fixed components, are as follows: Garcon Inc. Divisional Income Statements For the Year Ended December 31, 20Y2 Consumer Division Commercial Division Total * Sales: 3 $2,073,600.00 14,400 units $144 per unit 21.600 units $275 per unit 4 $5,940,000.00 $5,940,000.00 $2,073,600.00 5,940,000.00 $8,015,600.00 Total sales $2,073,600.00 Expenses Divisional Income Statements For the Year Ended December 31, 20Y2 Consumer Division 1 Commercial Division Total 2 Sales: 3 $2,073,600.00 14.400 units * $144 per unit 21,600 units * $275 per unit 4 $5,940,000.00 $2,073,600.00 5,940,000.00 $8,013,600.00 5 Total sales $2,073,600.00 $5,940,000.00 6 Expenses: 7 Variable: $1,497,600.00 9 14,400 units $104 per unit 21,600 units $195 per unit Fixed $4,168,800.00 520,000.00 $1,497,600.00 4,168,800.00 720,000.00 10 11 Total expenses 200,000.00 $1,697,600.00 $376,000.00 $4,688,800.00 $6,386,400.00 $1,627,200.00 Income from operations $1,251,200.00 The Consumer Division is presently producing 14,400 units out of a total capacity of 17,280 units. Materials used in producing the Commercial Division's product are currently purchased from outsido suppliers at a price of $150 per unit. The Consumer Division is able to produce the materials used by the Commercial Division. Except for the possible transfer of materials between divisions, no changes are expected in sales and expenses. Required: 1. Would the market price of $150 per unit be an appropriate transfer price for Garcon Inc.? Explain. 2. If the Commercial Division purchases 2,880 units from the Consumer Division, rather than externally, at a negotiated transfer price of $115 per unit, how much would the income from operations of each division and the total company income from operations increase? 3. Prepare condensed divisional Incomo statomonts for Garcon Inc. based on the data in Requirement 2 4 # a transfer price of $126 per unit is negotiated, how much would the income from operations of each division and the total company income from operations increase? a. What is the range of possible negotiated transfer prices that would be acceptable for Garcon Inc.? 56. Assuming that the managers of the two divisions cannot agree on a transfer price, what price would you suggest as the transfer price? Divisional Income Statements Consumer Division Commercial Division Total 1 Sales: 5 14.400 units $2,073,600.00 $2,073,600.00 331,200.00 4 2.880 units 331,200.00 5 21,600 units $5,940,000.00 5,940,000.00 5 Total sales $2,404,800.00 $5,940,000.00 $8,344,800.00 * Expenses: Variable: 17,280 units $1,797,120.00 $1,797,120.00 455,040.00 10 2.880 units $455,040.00 11 18720 units 1 Fixed 3,612,960.00 520,000.00 $4,588,000.00 $1,352,000.00 3,612,960.00 720,000.00 $6,585,120.00 200,000.00 $1,997,120.00 $407,680.00 13 Total expenses Income from operations $1,759,680.00 4. If a transfer price of $126 per unit is negotiated, how much would the income from operations of each division and the total company income from operations increase? The Consumer Division's income from operations would increase by $63,360 The Commercial Division's income from operations would increase by $69,120 Garcon Inc.'s total income from operations would increase by $132,480 5a. What is the range of possible negotiated transfer prices that would be acceptable for Garcon Inc.? Any transfer price greater expenses per unit but less than the Consumer Division's variable than the market price would be acceptable. 5b. Assuming that the managers of the two divisions cannot agree on a transfer price, what price would you suggest as the transfer price? $127.00

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