Transfer pricing analysis The Starrock Boat Company makes a variety of boats in a decentralized environment with three operating divisions. The Engine Division manufactures a four cylinder, 160 horsepower engine used to power the inboard-outboard units assembled in the Boat Division of the company. Each division is operated as an investment center. The transfer price used by the company is standard product cost plus 28 percent.

Following are standard and actual cost data for the production of the 5,000 engines manufac- tured during the period.

REQUIRED

a. Compute the transfer price for the engines using the company's usual transfer pricing model.

b. Compute the net income for the Engine Division using the transfer price computed in part a.

c. What would the net income have been if the Engine Division had experienced no variances during the period?

d. Compute the division's net income using a transfer price of actual product cost plus 18 percent.

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Direct materials Standard Actual $1,450,000 1,375,000 $1,690,000 1,555,000 Direct labor..... Manufacturing overhead Operating expenses 1,100,000 1,005,000 650,000