Home / Questions / EXERCISE 11A 2 Transfer Pricing from Viewpoint of the Entire Company LO5 Division A manuf...
EXERCISE 11A–2 Transfer Pricing from Viewpoint of the Entire Company [LO5]
Division A manufactures picture tubes for TVs. The tubes can be sold either to Division B of the same company or to outside customers. Last year, the following activity was recorded in Division A:
|
Selling price per tube . . . . . . . . . . . . . . . . . . |
$175 |
|
Variable cost per tube . . . . . . . . . . . . . . . . . . |
$130 |
|
Number of tubes: Produced during the year . . . . . . . . . . . . . |
20,000 |
|
Sold to outside customers . . . . . . . . . . . . . |
16,000 |
|
Sold to Division B . . . . . . . . . . . . . . . . . . . |
4,000 |
Sales to Division B were at the same price as sales to outside customers. The tubes purchased by Division B were used in a TV set manufactured by that division. Division B incurred $300 in additional variable cost per TV and then sold the TVs for $600 each.
Required:
1. Prepare income statements for last year for Division A, Division B, and the company as a whole.
2. Assume that Division A’s manufacturing capacity is 20,000 tubes per year. Next year, Divi- sion B wants to purchase 5,000 tubes from Division A, rather than only 4,000 tubes as in last year. (Tubes of this type are not available from outside sources.) From the standpoint of the company as a whole, should Division A sell the 1,000 additional tubes to Division B, or should it continue to sell them to outside customers? Explain.
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