6

XTL Company manufactures tables and has two divisions, the Production Division and the Assembly Division. The Production Division manufactures tables for the Assembly Division, which completes the tables and sells them to retailers. The Production Division "sells" tables to the Assembly Division. The market price for the Assembly Division to purchase a table is $50. (Ignore changes in inventory.) The fixed costs for the Production Division are assumed to be the same over the range of 40,000-103,000 units. The fixed costs for the Assembly Division are assumed to be $16 per pair at 103,000 units.

Production's cost of one unit of table:

Direct materials $11

Direct labour $9

Variable overhead $7

Division fixed costs $5

Assembly's cost of one completed table is:

Direct materials $20

Direct labour $7

Variable overhead $10

Division fixed costs $16

If the Assembly Division sells 103,000 tables for $120 per unit to customers, compare the difference in the overall corporate net income of XTL Company, if the Production Division transfers tables to the Assembly Division based on the transfer prices stated in Scenario A and Scenario B.

Scenario A: Negotiated transfer price of $33 per unit of table

Scenario B: Market-based transfer price