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 $31,20$Y$5$

GPS Systems

Division Communication

Systems Division

Total

Sales:

$90,000$ units @ $$60$ per unit $$5,400,000$ $$5,400,000$

$155,000$ units @ $$115$ per unit $$17,825,00017,825,000$

$$5,400,000$ $$17,825,000$ $$23,225,000$

Expenses:

Variable:

$90,000$ units @ $$41$ per unit $$(3,690,000)$ $$(3,690,000)$

$155,000$ units @ $$90$ per unit$*$ $$(13,950,000)(13,950,000)$

Fixed $250,000(600,000)(850,000)$

Total expenses $$(3,940,000)$ $$(14,550,000)$ $$(18,490,000)$

Operating income $$1,460,000$ $$3,275,000$ $$4,735,000$

$*$$$60$ of the $$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 $90,000$ 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 $$60$ per unit. The GPS Systems Division is able to produce the materials used by the Communication Systems Division at a variable cost of $$41$ 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.?

No

$2.$ 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 $5422$b$3$f$3$c$04$b$074\_2$

$275,000$

The Communication Systems Division's operating income would increase by

$fill in the blank $5422$b$3$f$3$c$04$b$074\_3$

$200,000$

Birrell Scientific Inc.$\text{'}$s total operating income would increase by

$fill in the blank $5422$b$3$f$3$c$04$b$074\_4$

$475,000$

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Review how transfer pricing functions.

$2.$ Multiply the units transferred by the difference between the transfer price $($supplying company$)$ or the market price $($purchasing company$)$ and the variable cost per unit.

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 $31,20$Y$5$

GPS Division Communication Division Total

Sales:

$90,000$ units $fill in the blank $963$bbaf$8$f$02$cf$8$c$\_1$

$5,400,000$

$fill in the blank $963$bbaf$8$f$02$cf$8$c$\_2$

$5,400,000$

$25,000$ units fill in the blank $963$bbaf$8$f$02$cf$8$c$\_3$

$1,300,000$

fill in the blank $963$bbaf$8$f$02$cf$8$c$\_4$

$1,300,000$

$155,000$ units $fill in the blank $963$bbaf$8$f$02$cf$8$c$\_5$

$17,825,000$

fill in the blank $963$bbaf$8$f$02$cf$8$c$\_6$

$17,825,000$

$fill in the blank $963$bbaf$8$f$02$cf$8$c$\_7$

$6,700,000$

$fill in the blank $963$bbaf$8$f$02$cf$8$c$\_8$

$17,825,000$

$fill in the blank $963$bbaf$8$f$02$cf$8$c$\_9$

$24,525,000$

Expenses:

Variable:

$115,000$ units $fill in the blank $963$bbaf$8$f$02$cf$8$c$\_10$

$fill in the blank $963$bbaf$8$f$02$cf$8$c$\_11$

$25,000$ units $fill in the blank $963$bbaf$8$f$02$cf$8$c$\_12$

fill in the blank $963$bbaf$8$f$02$cf$8$c$\_13$

$130,000$ units fill in the blank $963$bbaf$8$f$02$cf$8$c$\_14$

$-13,950,000$

fill in the blank $963$bbaf$8$f$02$cf$8$c$\_15$

Fixed fill in the blank $963$bbaf$8$f$02$cf$8$c$\_16$

$250,000$

fill in the blank $963$bbaf$8$f$02$cf$8$c$\_17$

$600,000$

fill in the blank $963$bbaf$8$f$02$cf$8$c$\_18$

Total expenses $fill in the blank $963$bbaf$8$f$02$cf$8$c$\_19$

$fill in the blank $963$bbaf$8$f$02$cf$8$c$\_20$

$fill in the blank $963$bbaf$8$f$02$cf$8$c$\_21$

Operating income $fill in the blank $963$bbaf$8$f$02$cf$8$c$\_22$

$fill in the blank $963$bbaf$8$f$02$cf$8$c$\_23$

$fill in the blank $963$bbaf$8$f$02$cf$8$c$\_24$

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$3.$ Keep in mind, $25,000$ units are transferred in at $$52$ per unit plus $$38$ in other variable conversion expenses incurred within the division.

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$4.$ 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 Division$$s operating income would increase by

$fill in the blank $9$bd$8$e$2$f$86$fcb$05$c$\_1$

$225,000$

The Communication Systems Division's operating income would increase by

$fill in the blank $9$bd$8$e$2$f$86$fcb$05$c$\_2$

Birrell Scientific Scientific Inc.$\text{'}$s total operating income would increase by

$fill in the blank $9$bd$8$e$2$f$86$fcb$05$c$3$

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

Between $fill in the blank $9$bd$8$e$2$f$86$fcb$05$c$\_4$

and $fill in the