Leapin Larrys PreOwned Cars has two divisions Operations and

Leapin\' Larry\'s Pre-Owned Cars has two divisions, Operations and Financing Operations is responsible for selling Larry\'s inventory as quickly as possible and purchasing cars for future sale. Financing Division takes loan applications and packages loans into pools and sells them in the financial markets. It also services the loans. Both divisions meet the requirements for segment disclosures under accounting rules Operations Division had $68 million in sales last year. Costs, other than those charged by Financing Division, totaled $30 million. Financing Division earned revenues of $21 million from servicing loans and incurred outside costs of $22 million. In addition, Financing charged Operations $20 million for loan-related fees Operations\'s manager complained to Larry that Financing was charging twice the commercial rate for loan-related fees and that Operations would be better off sending its buyers to an outside lender Financing\'s manager replied that although commercial rates could be lower, servicing Larry\'s loans is more difficult, thereby justifying the higher fees Required a. What are the reported segment operating profits for each division, ignoring income taxes and using the $20 million transfer price for the loan-related fees? (Enter your answers in millions.) Operation Division Financing Division b. What are the reported segment operating profits for each division, ignoring income taxes and using a $10 million commercial rate as the transfer price for the loan- related fees? (Enter your answers in millions.) Operation Division Financing Division

Solution

a Item Operation Division Financing Division Outside sales revenue 68 21 Transfer price 20 Total revenue 68 41 Less: Outside costs 30 22     Transfer 20 0 Total Costs 50 22 Operating profit before tax 18 19 b Item Operation Division Financing Division Outside sales revenue 68 21 Transfer price 10 Total revenue 68 31 Less: Outside costs 30 22     Transfer 10 Total Costs 40 22 Operating profit before tax 28 9