Birrell Scientific Inc. manufactures electronic products, with two operating divisions, the GPS Systems and Communication Systems divisions. Condensed divisional income statements, which involve no intracompany transfers and which include a breakdown of expenses into variable and fixed components, are as follows:

Birrell Scientific Inc. Divisional Income Statements For the Year Ended December 31, 20Y5
	GPS Systems Division			Communication Systems Division			Total
Sales:
85,000 units @ $60 per unit	$5,100,000						$5,100,000
155,000 units @ $115 per unit				$17,825,000			17,825,000
	$5,100,000			$17,825,000			$22,925,000
Expenses:
Variable:
85,000 units @ $43 per unit	$(3,655,000)						$(3,655,000)
155,000 units @ $90 per unit*				$(13,950,000)			(13,950,000)
Fixed	250,000			(600,000)			(850,000)
Total expenses	$(3,905,000)			$(14,550,000)			$(18,455,000)
Operating income	$1,195,000			$3,275,000			$4,470,000

*$60 of the $90 per unit represents materials costs, and the remaining $30 per unit represents other variable conversion expenses incurred within the Communication Systems Division.

The GPS Systems Division is presently producing 85,000 units out of a total capacity of 150,000 units. Materials used in producing the Communication Systems Division's product are currently purchased from outside suppliers at a price of $60 per unit. The GPS Systems Division is able to produce the materials used by the Communication Systems Division at a variable cost of $43 per unit. Except for the possible transfer of materials between divisions, no changes are expected in sales and expenses.

Required:

Question Content Area

1. Would the market price of $60 per unit be an appropriate transfer price for Birrell Scientific Inc.?

YesNo

2. If the Communication Systems Division purchases 25,000 units from the GPS Systems Division, rather than externally, at a negotiated transfer price of $52 per unit, how much would the operating income of each division and the total company operating income increase?

The GPS Systems Division's operating income would increase by $fill in the blank 8a0d9ff58fc5fd2_2

The Communication Systems Division's operating income would increase by $fill in the blank 8a0d9ff58fc5fd2_3

Birrell Scientific Inc.'s total operating income would increase by $fill in the blank 8a0d9ff58fc5fd2_4

Question Content Area

3. Prepare condensed divisional income statements for Birrell Scientific Inc. based on the data in part (2).

Birrell Scientific, Inc. Divisional Income Statements For the Year Ended December 31, 20Y5

	GPS Division	Communication Division	Total
Sales:
85,000 units	$fill in the blank 1e15c20a9fb601b_1		$fill in the blank 1e15c20a9fb601b_2
25,000 units	fill in the blank 1e15c20a9fb601b_3		fill in the blank 1e15c20a9fb601b_4
155,000 units		$fill in the blank 1e15c20a9fb601b_5	fill in the blank 1e15c20a9fb601b_6
	$fill in the blank 1e15c20a9fb601b_7	$fill in the blank 1e15c20a9fb601b_8	$fill in the blank 1e15c20a9fb601b_9
Expenses:
Variable:
110,000 units	$fill in the blank 1e15c20a9fb601b_10		$fill in the blank 1e15c20a9fb601b_11
25,000 units		$fill in the blank 1e15c20a9fb601b_12	fill in the blank 1e15c20a9fb601b_13
130,000 units		fill in the blank 1e15c20a9fb601b_14	fill in the blank 1e15c20a9fb601b_15
Fixed	fill in the blank 1e15c20a9fb601b_16	fill in the blank 1e15c20a9fb601b_17	fill in the blank 1e15c20a9fb601b_18
Total expenses	$fill in the blank 1e15c20a9fb601b_19	$fill in the blank 1e15c20a9fb601b_20	$fill in the blank 1e15c20a9fb601b_21
Operating income	$fill in the blank 1e15c20a9fb601b_22	$fill in the blank 1e15c20a9fb601b_23	$fill in the blank 1e15c20a9fb601b_24

Question Content Area

4. If a transfer price of $49 per unit is negotiated, how much would the operating income of each division and the total company operating income increase?

The GPS Systems Divisions operating income would increase by $fill in the blank a414d7f4b05e077_1

The Communication Systems Division's operating income would increase by $fill in the blank a414d7f4b05e077_2

Birrell Scientific Scientific Inc.'s total operating income would increase by $fill in the blank a414d7f4b05e077_3

5a. What is the range of possible negotiated transfer prices that would be acceptable for Birrell Scientific Inc.?

Between $fill in the blank a414d7f4b05e077_4 and $fill in the blank a414d7f4b05e077_5

5b. Assuming that the managers of the two divisions cannot agree on a transfer price, what transfer price would represent the best compromise? If required, round your answer to the nearest dollar.

$

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