Question
Branded Shoe Company manufactures only one type of shoe and has two divisions: Assembly and Finishing. The Assembly Division manufactures shoes for the Finishing Division.
Branded Shoe Company manufactures only one type of shoe and has two divisions: Assembly and Finishing. The Assembly Division manufactures shoes for the Finishing Division. After completing the pair of shoes Finishing sells them externally to retailer shoe stores for a price of $100 per pair of shoes. The Assembly Division transfers all shoes internally to Finishing. If Assembly were to sell externally, the price is $42 per pair.
Assembly's costs per pair: |
|
Direct materials | $ 10 |
Direct labor | $ 8 |
Variable overhead | $ 7 |
Division fixed costs | $ 5 |
Finishing's costs per pair: |
|
Direct materials | $ 14 |
Direct labor | $ 6 |
Variable overhead | $ 4 |
Division fixed costs | $ 16 |
Calculate and compare the difference in Branded Shoe Companys Operating Income between Transfer Price Scenarios A and B if the Assembly Division sells 100,000 pairs of to the Finishing Division.
Scenario A: Negotiated transfer price of $34 per pair
Scenario B: Market-based transfer price per pair
Multiple Choice
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$800,000 more operating income under Scenario B.
-
$800,000 more operating income under Scenario A.
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$80,000 more operating income under Scenario A.
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The operating income is the same under both scenarios.
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