DePaolo Industries manufactures carpets, furniture, and foam in three separate divisions. DePaolo's operating statement for 20XX is reproduced below.

Additional information regarding DePaolo's operations are as follows:

Included in foam's sales revenue is \(\$ 500,000\) in revenue that represents sales made to the furniture division that were transferred at manufacturing cost. The cost of goods sold is composed of the following costs.

Administrative expenses include the following costs.

Selling expense is all incurred at the segment level and is \(80 \%\) variable for all segments. John Sprint, manager of the foam division, is not pleased with DePaolo's presentation of operating performance. Sprint claimed, "The foam division makes a greater contribution to the company's profits than what is shown. I sell foam to the furniture division at cost and it gets our share of the profit. I can sell that foam on the outside at my regular markup, but I sent to furniture for the well-being of the company. I think my division should get credit for those internal sales at market. I think we should also revise our operating statements for internal purposes. Why don't we consider preparing these internal statements on a contribution approach reporting format showing internal transfers at market?"

{Required:}

(a) John Sprint believes that the intra-company transfers from the foam division to the furniture division should be at market rather than manufacturing cost for divisional performance measurement.
1. Explain why Sprint is correct.
2. Identify and describe two approaches used for setting transfer prices other than manufacturing cost (used by DePaolo Industries) and market price (as recommended by Sprint).

(b) Using the contribution approach and market based transfer prices, prepare a revised operating statement by division for DePaolo Industries for 20XX that will promote the evaluation of divisional performance.

Transcribed Image Text:

Carpet Furniture Foam Direct material....... Variable overhead............. Direct labor........ Fixed overhead....... $ 500,000 $1,000,000 $1,000,000 500,000 200,000 1,000,000 750,000 50,000 1,000,000 250,000 50,000 0 Total cost of goods sold $2,000,000 $1,300,000 $3,000,000