Home / Questions / PROBLEM 11A 4 Market-Based Transfer Price LO5 Damico Company’s Board Division manufactures...
PROBLEM 11A–4 Market-Based Transfer Price [LO5]
Damico Company’s Board Division manufactures an electronic control board that is widely used in high-end DVD players. The cost per control board is as follows:
|
Variable cost per board . . . . . . . . . . . . . . . . . . . . . . . . |
$120 |
|
Fixed cost per board* . . . . . . . . . . . . . . . . . . . . . . . . . |
30 |
|
Total cost per board . . . . . . . . . . . . . . . . . . . . . . . . . . |
$150 |
Part of the Board Division’s output is sold to outside manufacturers of DVD players, and part is sold to Damico Company’s Consumer Products Division, which produces a DVD player under
the Damico name. The Board Division charges a selling price of $190 per control board for all sales, both internally and externally.
The costs, revenues, and net operating income associated with the Consumer Products Divi- sion’s DVD player are given below:
|
Selling price per player . . . . . . . . . . . . . . . . . . . . . . . . Variable costs per player: Cost of the control board . . . . . . . . . . . . . . . . . . . . . |
$190 |
$580 |
|
Variable cost of other parts . . . . . . . . . . . . . . . . . . . |
230 |
|
|
Total variable costs . . . . . . . . . . . . . . . . . . . . . . . . . . . |
|
420 |
|
Contribution margin . . . . . . . . . . . . . . . . . . . . . . . . . . |
|
160 |
|
Fixed costs per player* . . . . . . . . . . . . . . . . . . . . . . . . |
|
85 |
|
Net operating income per player . . . . . . . . . . . . . . . . |
|
$ 75 |
|
*Based on a capacity of 200,000 DVD players per year. |
|
|
The Consumer Products Division has an order from an overseas distributor for 5,000 DVD players. The distributor wants to pay only $400 per DVD player.
Required:
1. Assume that the Consumer Products Division has enough idle capacity to fill the 5,000-unit order. Is the division likely to accept the $400 price, or to reject it? Explain.
2. Assume that both the Board Division and the Consumer Products Division have idle capacity. Under these conditions, would rejecting the $400 price be advantageous for the company as a whole, or would it result in the loss of potential profits? Show computations to support your answer.
3. Assume that the Board Division is operating at capacity and could sell all of its control boards to outside manufacturers of DVD players. Assume, however, that the Consumer Products Divi- sion has enough idle capacity to fill the 5,000-unit order. Under these conditions, compute the profit impact to the Consumer Products Division of accepting the order at the $400 price.
4. What conclusions do you draw concerning the use of market price as a transfer price in intracompany transactions?
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