Homework SourseI am having trouble with questions 1 2 4 and 5a and b For so
I am having trouble with questions 1, 2, 4, and 5a and b. For some reason, the solution in the Accounting Book 26th edition by Warren/Reeve/Duchac is not showing a solution and I have paid for the solution subscription already.
OBJ, 5 PR 24-6B Transfer pricing Exoplex Industries Inc. is a diversified aerospace company, including two operating d sions, Sem statements, which into variable and fixed components, are as follows niconductors and Navigational Systems divisions. Condensed divisional income involve no intracompany transfers and include a breakdown of expenses Exoplex Industries Inc. Divisional Income Statements For the Year Ended December 31, 2016 Navigational Semiconductors Systems Division Total Division Sales $ 887,040 $2,168,250 2,168,250 5887040 $2,168,250$3,055,290 $887,040 2,240 units@$396 per unit 3,675 units@ $590 per unit Expenses: Variable: s 519,680 1,734,600 1,734,600 545,000 $519,680 2,240 units @ $232 per unit 3,675 units@ $472* per unit 220,000 $739,680$2,059,600 $2,799,280 $147,360 108,650 5 256,010 Fixed 325,000 Total expenses Income from operations $432 of the $472 per unit represents materials costs, and the remaining $40 per unit represents other variable conversion expenses incurred within the Navigational Systems Division. The Semiconductors Division is presently producing 2,240 units out of a total ca- pacity of 2,820 units. Materials used in producing the Navig roduct are currently purchased from outside suppliers at a price of $432 per unit. The ormance Evaluation for Decentralized Operations Semiconductors Division is able to produce the components used by the Navigational Systems Division. Except for the possible transfer of materials between divisions, no changes are expected in sales and expenses. Instructions 1Would the market price of $432 per unit be an appropriate transfer price for Exoplex Industries Inc.? Explain. 2. If the Navigational Systems Division purchases 580 units from the Semicon- ductors Division, rather than externally, at a negotiated transfer price of $310 per unit, how much would the income from operations of each division and total com 3. Prepare condensed divisional income statements for Exoplex Industries Inc. based on 4If a transfer price of $340 per unit is negotiated, how much would the income 5. aWhat is the range of possible negotiated transfer prices that would be income from operations increase? the data in part (2). from operations of each division and total company income from operations increase acceptable for Exoplex Industries Inc.? b. Assuming that the managers of the two divisions cannot agree on a transfer price, what price would you suggest as the transfer price? PIC.COLLAGESolution
Solution-
Step-1
It is a problem on deciding the extra capacity use in internal consumption. It is an Aerospace company. It has two division viz, Semi conductor and Navigational system. In Semi conductor capacity is 2,820 units, but current sale is 2,240 units. So unused capacity is 2,820-2,240=580 units. It can be used in producing goods to be used by Navigation department.
Current profitability statement of the concern is as follows:
Profitability statement of the Aerospace company for the year ended Dec31,2016
Details
Semiconductor
Navigation syst.
Total
1
Quantity sold
2240
3675
5915
2
Sales price
396
590
3
Sales [1*2]
887040
2168250
3055290
4
Expenses
Variable cost [$232,$472]
519680
1734600
2254280
Fixed cost
220000
325000
545000
Total cost
739680
2059600
2799280
5
Contribution [3-4a]
367360
433650
801010
6
Profit
147360
108650
256010
Step 2: These 580 units are manufactured by semi conductor at same variable cost of $232. So it will mean aviation can reduce buy of 580 units at $432. It will definitely profitable for the concern as a whole. But the question is whether this quantity will be transferred at $432 or not. Answer is no. At this price, entire benefit of internal transfer is reflected in the profitability of Semi conductor. No benefit is passed to Navigation. So their Managers will not be interested in this buy. Hence transfer price should provide some benefits to both divisions.
Step 3:
If transfer price is $310, then both divisions have some gain. Semi conductor is producing at $232 and transferring at $310. So $310-$232=$78 per unit is extra profit. For Navigation, instead of buying at $432 internal price is $310. So profit/contribution per unit is $432-$310=$122
Step 4:
Based on the above aalysis profitability statement after transfer at $310 is-
Profitability statement when 580 units produced iternally at transfer price of $310
1
Profit from use of extra capacity
a
Quantity produced for internal use
580
b
Transfer price
$310
c
Variable cost
$232
d
Contribution per unit [310-232]
78
e
Increase in contribution
45240
2
Profit from internal buy :
a
Quantity bought from Semi conductor
580
b
Purchase price
$472
c
Transfer price
$310
d
Cost saved [$472-$310]
162
e
Increase in contribution
93960
f
Total increase in profit
45240
93960
139200
g
Past profit
147360
108650
256010
h
Total profit after internal transfer [f+g]
192600
202610
395210
Thus net profit is going up by $139,200
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Step 5:
If transfer price is $340 instead of $310, then profit of departments will change. For Semi conductor it will be $30 per unit more. For Navigation it will drop by $30. But overall picture will not change.
Profitability statement when 580 units produced iternally at transfer price of $340
1
Profit from use of extra capacity
a
Quatity produced for internal use
580
b
Transfer price
$340
c
Variable cost
$232
d
Contribution per unit [340-232]
108
e
Increase in contribution
62640
2
Profit from internal buy :
a
Quantity bought from Semi conductor
580
b
Purchase price
$472
c
Transfer price
$340
d
Cost saved [$472-$310]
132
E
Increase in contribution
76560
F
Total increase in profit
62640
76560
139200
G
Past profit
147360
108650
256010
H
Total profit after internal transfer [f+g]
210000
185210
395210
| Profitability statement of the Aerospace company for the year ended Dec31,2016 | |||||
| Details | Semiconductor | Navigation syst. | Total | ||
| 1 | Quantity sold | 2240 | 3675 | 5915 | |
| 2 | Sales price | 396 | 590 | ||
| 3 | Sales [1*2] | 887040 | 2168250 | 3055290 | |
| 4 | Expenses | ||||
| Variable cost [$232,$472] | 519680 | 1734600 | 2254280 | ||
| Fixed cost | 220000 | 325000 | 545000 | ||
| Total cost | 739680 | 2059600 | 2799280 | ||
| 5 | Contribution [3-4a] | 367360 | 433650 | 801010 | |
| 6 | Profit | 147360 | 108650 | 256010 |
