Transfer pricing OBJ. 5 Exoplex Industries Inc. is a diversified aerospace company, including two operating divisions, Semiconductors and Navigational Systems divisions. Condensed divisional income statements, which involve no intracompany transfers and include a breakdown of expenses into variable and fixed components, are as follows:

Exoplex Industries Inc.

Divisional Income Statements For the Year Ended December 31, 2016 Semiconductors Division Navigational Systems Division Total Sales:

2,240 units @ $396 per unit $887,040 $ 887,040 3,675 units @ $590 per unit $2,168,250 2,168,250

$887,040 $2,168,250 $3,055,290 Expenses:

Variable:

2,240 units @ $232 per unit $519,680 $ 519,680 3,675 units @ $472* per unit $1,734,600 1,734,600 Fixed 220,000 325,000 545,000 Total expenses $739,680 $2,059,600 $2,799,280 Income from operations $147,360 $ 108,650 $ 256,010

*$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 capacity of 2,820 units. Materials used in producing the Navigational Systems Division’s product are currently purchased from outside suppliers at a price of $432 per unit. The 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 1. Would 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 Semiconductors 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 company income from operations increase?
3. Prepare condensed divisional income statements for Exoplex Industries Inc. based on the data in part (2).
4. If a transfer price of $340 per unit is negotiated, how much would the income from operations of each division and total company income from operations increase?
5.

a. What is the range of possible negotiated transfer prices that would be 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?
Cases & Projects