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Transfer pricing

Garcon Inc. manufactures electronic products, with two operating divisions, Consumer and Commercial. Condensed divisional income statements, which involve no intracompany transfers and which include a breakdown of expenses into variable and fixed components, are as follows:

Line Item Description	Consumer Division	Commercial Division	Total
Sales:
14,400 units $144 per unit	$2,073,600		$2,073,600
21,600 units $275 per unit		$5,940,000	5,940,000
Total sales	$2,073,600	$5,940,000	$8,013,600
Expenses:
Variable:
14,400 units $104 per unit	$(1,497,600)		$(1,497,600)
21,600 units $193* per unit		$(4,168,800)	(4,168,800)
Fixed	(200,000)	(520,000)	(720,000)
Total expenses	$(1,697,600)	$(4,688,800)	$(6,386,400)
Operating income	$376,000	$1,251,200	$1,627,200

*$150 of the $193 per unit represents materials costs, and the remaining $43 per unit represents other variable conversion expenses incurred within the Commercial Division.

The Consumer Division is presently producing 14,400 units out of a total capacity of 17,280 units. Materials used in producing the Commercial Division's product are currently purchased from outside suppliers at a price of $150 per unit. The Consumer Division is able to produce the materials used by the Commercial Division. Except for the possible transfer of materials between divisions, no changes are expected in sales and expenses.

Required:

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1. Would the market price of $150 per unit be an appropriate transfer price for Garcon Inc.?

YesNo

2. If the Commercial Division purchases 2,880 units from the Consumer Division, rather than externally, at a negotiated transfer price of $115 per unit, how much would the operating income of each division and the total company operating income increase?

The Consumer Division's operating income would increase by fill in the blank 1 of 1$

The Commercial Division's operating income would increase by fill in the blank 1 of 1$

Garcon Inc.'s total operating income would increase by fill in the blank 1 of 1$

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

Line Item Description	Consumer Division	Commercial Division	Total
Sales:
14,400 units	$14,400 units		$14,400 units
2,880 units	2,880 units		2,880 units
21,600 units		$21,600 units	21,600 units
Total sales	$Total sales	$Total sales	$Total sales
Expenses:
Variable:
17,280 units	$17,280 units		$17,280 units
2,880 units		$2,880 units	2,880 units
18,720 units		18,720 units	18,720 units
Fixed	Fixed	Fixed	Fixed
Total expenses	$Total expenses	$Total expenses	$Total expenses
Operating income	$Operating income	$Operating income	$Operating income

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4. If a transfer price of $126 per unit is negotiated, how much would the operating income of each division and the total company operating income increase?

The Consumer Division's operating income would increase by fill in the blank 1 of 1$

The Commercial Division's operating income would increase by fill in the blank 1 of 1$

Garcon Inc.'s total operating income would increase by fill in the blank 1 of 1$

5a. What is the range of possible negotiated transfer prices that would be acceptable for Garcon Inc.? Any transfer price

lessgreater

than the Consumer Division's variable expenses per unit but

lessgreater

than the market price would be acceptable.

5b. Assuming that the managers of the two divisions cannot agree on a transfer price, what price would you suggest as the transfer price? fill in the blank 1 of 1$