Question

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

1		Consumer Division	Commercial Division	Total
2	Sales:
3	14,400 units × $144 per unit	$2,073,600.00		$2,073,600.00
4	21,600 units × $275 per unit		$5,940,000.00	5,940,000.00
5	Total sales	$2,073,600.00	$5,940,000.00	$8,013,600.00
6	Expenses:
7	Variable:
8	14,400 units × $104 per unit	$1,497,600.00		$1,497,600.00
9	21,600 units × $193* per unit		$4,168,800.00	4,168,800.00
10	Fixed	200,000.00	520,000.00	720,000.00
11	Total expenses	$1,697,600.00	$4,688,800.00	$6,386,400.00
12	Income from operations	$376,000.00	$1,251,200.00	$1,627,200.00

*$150 of the $193 per unit represents materials costs, and the remaining $43 per unit represents other variable conversion expenses incurred within the Commercial Division.

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 outside 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 income statements for Garcon Inc. based on the data in Requirement 2.
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?
5a.	What is the range of possible negotiated transfer prices that would be acceptable for Garcon Inc.?
5b.	Assuming that the managers of the two divisions cannot agree on a transfer price, what price would you suggest as the transfer price?

Starting Questions

Shaded cells have feedback.

1. Would the market price of $150 per unit be an appropriate transfer price for Garcon Inc.? Explain.

No . When unused capacity exists in the supplying division (the Consumer Division), the use of the market price approach may not lead to the maximization of total company income.

Points:

2 / 2

Feedback

Check My Work

Review how transfer pricing functions. Remember the use of the market price approach may not lead to the maximization of total company income.

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?

The Consumer Division's income from operations would increase by

Points:

1 / 1

The Commercial Division's income from operations would increase by

Points:

1 / 1

Garcon Inc.’s total income from operations would increase by

Points:

1 / 1

Feedback

Check My Work

Multiply the units transferred by the difference between the transfer price and the variable cost per unit (supplying company) or the market price and the transfer price (purchasing company).

Divisional Income Statements

Shaded cells have feedback.

3. Prepare condensed divisional income statements for Garcon Inc. based on the data in Requirement 2.

Score: 85/97

Garcon Inc.

Divisional Income Statements

For the Year Ended December 31, 20Y2

1		Consumer Division	Commercial Division	Total
2	Sales:
3	14,400 units	?		?
4	2,880 units	?		?
5	21,600 units		?	?
6	Total sales	?	?	?
7	Expenses:
8	Variable:
9	17,280 units	?		?
10	2,880 units		?	?
11	18,720 units		?	?
12	Fixed	?		?
13	Total expenses	?		?
14	Income from operations	?		?

Points:

21.03 / 24

Feedback

Check My Work

When calculating the variable expense, the cost of the units transferred in must be computed as transfer price plus operating cost.

Final Questions

Shaded cells have feedback.

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

Points:

1 / 1

The Commercial Division's income from operations would increase by

Points:

1 / 1

Garcon Inc.'s total income from operations would increase by

Points:

1 / 1

Feedback

Check My Work

Multiply the units transferred by the difference between the transfer price and the variable cost per unit (supplying company) or the market price and the transfer price (purchasing company).

5a. What is the range of possible negotiated transfer prices that would be acceptable for Garcon Inc.?

Any transfer price greater than the Consumer Division’s variable expenses per unit but less than the market price would be acceptable.

Points:

2 / 2

5b. Assuming that the managers of the two divisions cannot agree on a transfer price, what price would you suggest as the transfer price?

Please answer questions by using Excel. Thank you

Answer 1