Question

In the Bombadier Company, Division A has a product that can be sold either to outside customers or to Division B. Information about these divisions is given below:

Case 1   Case 2

Division A:                          

    Capacity in units           100,000                 100,000

    Number of units sold externally            100,000                 60,000

    Market selling price    $90         $75

    Variable costs per unit               73           58

    Fixed costs per unit based on capacity 10           10

Division B:                          

    Number of units needed for production            40,000   40,000

    Purchase price per unit from external supplier                $86         $74

The company uses the opportunity cost approach to transfer pricing. Which case should not be transferred internally?

a.Both should be transferred internally.

b.Neither should be transferred internally.

c.Case 2

d.Case 1

Panther Company had the following historical accounting data per unit:

Direct materials $60

Direct labor         30

Variable overhead           15

Fixed overhead 24

Variable selling expenses             45

Fixed selling expenses   9

The units are normally transferred internally from Division A to Division B. The units also may be sold externally for $210 per unit. The minimum profit level accepted by the company is a markup of 30 percent. There were no beginning or ending inventories.

If the negotiated price is used, Division A's transfer price should be a

a.maximum of $210.00.

b.maximum of $198.90.

c.minimum of $153.00.

d.minimum of $120.00.

Which of the following is a disadvantage of both residual income and ROI?

a.They both do not discourage myopic behavior.

b.They are both absolute measures of return.

c.They are both difficult to calculate.

d.All of these choices are disadvantages of both ROI and residual income.

Answer 1

Ans a Both should be tramsferred internally
The price needs to be negotiated
for Case 1 Maximum is $86 (paid to outside) and minimym is $73 (variabe cost for Division A), any price between it should be negotiated
For case 2 Min price is $58 and maximum is $74 , so price should be negotiated.
ans b
Option D maximum of $210
As this is the market price so from the point of view of Division A $210 should be the maximum price.
ans c
a.They both do not discourage myopic behavior.
Both ROI and residual income do not discourage myopic behavior
If any doubt please comment