trade of output for accounting cu"ency United Management has a divisionalized structure. Various divisions enjoy considerable autonomy. Central management provides oversight, finaneial management, and strategic planning. Cash is eentrally managed.

Division B has encountered an opportunity to provide speeialized manufacturing for an established customer. The customer will pay 100. The catch is divisions A and B will hoth have to eontribute manufacturing resourees. A will do the preliminal)'

work and then transfer the semifinished produet to B, and B wiU then eomplete the manufacturing and deliver the item to the eustomer. The eost wiIl total 60, with 50 incurred in division A and 10 in division B. The transfer price, from B to A, is set at the amount T.

aJ Assume the opportunity is taken. Determine the ineremental profit (i) to the firm; (ii) to division A; and (iii) to division B.

bJ Provide journal entries on division A's books to reeord all activity associated with this opportunity. Inelude entries for work in process, eost of goods sold, revenue, and so on. (oo not cIose any temporary accounts.) For eonvenience, assume all eost incurred by A is associated with cash expenditures. Make certain the incremental profit implied by your entries agrees with your answer in la] above.

eJ OO the same for division B's hooks.

dj When United Management prepares eonsolidated financial statements, will the eonsolidation process, working from your above entries, resuU in a firm-wide ineremental profit that agrees with your answer in [a]? Explain.

e] Carefully document what happens to your answers in [b J, [e J, and [dJ above as T is varled hetween 30 and 120. What is the minimum T that would not lower A's divisional income? What is the maximum T that would not lower B's divisional ineome?

f) As T varles between 30 and 120, how mueh cash is paid by division B to division A? Explain your answer.

gJ What purpose is served by transfer price T in this setting? OO you think the two managers are using the transfer price to inform eaeh other about local eosts and henefits? Explain your reasoning.

AppendixLO1