Garcon Inc. manufactures electronic products, with two operating divisions, the Consumer and Commercial 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:

GARCON INC.

Divisional Income Statements

For the Year Ended December 31, 2016

1		Consumer Division	Commercial Division	Total
2	Sales:
3	14,400 units @ $144 per unit	$2,073,600.00		$2,073,600.00
4	21,600 units @ $275 per unit		$5,940,000.00	5,940,000.00
5		$2,073,600.00	$5,940,000.00	$8,013,600.00
6	Expenses:
7	Variable:
8	14,400 units @ $104 per unit	$1,497,600.00		$1,497,600.00
9	21,600 units @ $193* per unit		$4,168,800.00	4,168,800.00
10	Fixed	200,000.00	520,000.00	720,000.00
11	Total expenses	$1,697,600.00	$4,688,800.00	$6,386,400.00
12	Income from operations	$376,000.00	$1,251,200.00	$1,627,200.00

*$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 Divisions 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:
1.	Would the market price of $150 per unit be an appropriate transfer price for Garcon Inc.? Explain.
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 income from operations of each division and the total company income from operations increase?
3.	Prepare condensed divisional income statements for Garcon Inc. based on the data in Requirement 2.
4.	If a transfer price of $126 per unit is negotiated, how much would the income from operations of each division and the total company income from operations increase?

1. Review how transfer pricing functions. Remember the use of the market price approach may not lead to the maximization of total company income.

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 income from operations of each division and the total company income from operations increase?

A.) The Consumer Division's income from operations would increase by

B.) The Commercial Division's income from operations would increase by

C.) Garcon Inc.s total income from operations would increase by

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

Divisional Income Statements

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

GARCON INC.

Divisional Income Statements

For the Year Ended December 31, 2016

1		Consumer Division	Commercial Division	Total
2	Sales:
3	14,400 units
4	2,880 units
5	21,600 units
6
7	Expenses:
8	Variable:
9	17,280 units
10	2,880 units
11	18,720 units
12	Fixed
13	Total expenses
14	Income from operations

Solution

GARCON INC.

Divisional Income Statements

For the Year Ended December 31, 2016

1		Consumer Division	Commercial Division	Total
2	Sales:
3	14,400 units
4	2,880 units
5	21,600 units
6
7	Expenses:
8	Variable:
9	17,280 units
10	2,880 units
11	18,720 units
12	Fixed
13	Total expenses
14	Income from operations

3. When calculating the variable expense, the cost of the units transferred in must be computed as transfer price plus operating cost.

Final Question

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

The Consumer Division's income from operations would increase by

The Commercial Division's income from operations would increase by

Garcon Inc.'s total income from operations would increase by