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For the following questions (8-10) about transfer pricing, assume the organization is X Co. Division S produces a component that can be sold to outside

For the following questions (8-10) about transfer pricing, assume the organization is X Co. Division S produces a component that can be sold to outside customers at a fair market price or to Division B at a transfer price. Division B uses the component to produce a finished product it sells to outside customers. Division B can also purchase the component from an outside supplier, Co. O at a fair market price.

8. Division S produces a component that is used by Division B. Division Ss costs of manufacturing the component is: Direct materials $30; Direct labor $8; Variable overhead $10; Fixed overhead $12 (based on a practical volume of 250,000 components).

Division S also incurs these costs: fixed selling & administrative $1,200,000, and variable selling $4/unit.

Division S expects to sell only 200,000 components next year. The variable selling expenses are avoidable if the component is sold internally.

Division B has been buying the same component from an external supplier for $80 each. It expects to use 40,000 units of the component next year. The manager of Division B has offered to buy 40,000 units from Division S for $56 each.

The maximum/minimum transfer price should be respectively:

a.

$80/48

c.

$48/48

b.

$60/50

d.

$38/30

9. Refer to question 8. Suppose Divisions S and B agree on a transfer price of $56. What is the benefit to each division respectively?

a.

$320,000/$960,000

c.

$960,000/$320,000

b.

$1,280,000/$0

d.

$0/$1,280,000

10. Refer to question 8. If S is at full capacity, the transfer price should be:

a.

Between $30 and $80

c.

$30

b.

$80

d.

$60

16. Time-s

For the following questions (8-10) about transfer pricing, assume the organization is X Co. Division S produces a component that can be sold to outside customers at a fair market price or to Division B at a transfer price. Division B uses the component to produce a finished product it sells to outside customers. Division B can also purchase the component from an outside supplier, Co. O at a fair market price.

8. Division S produces a component that is used by Division B. Division Ss costs of manufacturing the component is: Direct materials $30; Direct labor $8; Variable overhead $10; Fixed overhead $12 (based on a practical volume of 250,000 components).

Division S also incurs these costs: fixed selling & administrative $1,200,000, and variable selling $4/unit.

Division S expects to sell only 200,000 components next year. The variable selling expenses are avoidable if the component is sold internally.

Division B has been buying the same component from an external supplier for $80 each. It expects to use 40,000 units of the component next year. The manager of Division B has offered to buy 40,000 units from Division S for $56 each.

The maximum/minimum transfer price should be respectively:

a.

$80/48

c.

$48/48

b.

$60/50

d.

$38/30

9. Refer to question 8. Suppose Divisions S and B agree on a transfer price of $56. What is the benefit to each division respectively?

a.

$320,000/$960,000

c.

$960,000/$320,000

b.

$1,280,000/$0

d.

$0/$1,280,000

10. Refer to question 8. If S is at full capacity, the transfer price should be:

a.

Between $30 and $80

c.

$30

b.

$80

d.

$60

16. Time-s

For the following questions (8-10) about transfer pricing, assume the organization is X Co. Division S produces a component that can be sold to outside customers at a fair market price or to Division B at a transfer price. Division B uses the component to produce a finished product it sells to outside customers. Division B can also purchase the component from an outside supplier, Co. O at a fair market price.

8. Division S produces a component that is used by Division B. Division Ss costs of manufacturing the component is: Direct materials $30; Direct labor $8; Variable overhead $10; Fixed overhead $12 (based on a practical volume of 250,000 components).

Division S also incurs these costs: fixed selling & administrative $1,200,000, and variable selling $4/unit.

Division S expects to sell only 200,000 components next year. The variable selling expenses are avoidable if the component is sold internally.

Division B has been buying the same component from an external supplier for $80 each. It expects to use 40,000 units of the component next year. The manager of Division B has offered to buy 40,000 units from Division S for $56 each.

The maximum/minimum transfer price should be respectively:

a.

$80/48

c.

$48/48

b.

$60/50

d.

$38/30

9. Refer to question 8. Suppose Divisions S and B agree on a transfer price of $56. What is the benefit to each division respectively?

a.

$320,000/$960,000

c.

$960,000/$320,000

b.

$1,280,000/$0

d.

$0/$1,280,000

10. Refer to question 8. If S is at full capacity, the transfer price should be:

a.

Between $30 and $80

c.

$30

b.

$80

d.

$60

16. Time-s

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