Question
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
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?
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 3. Prepare condensed divisional income statements for Garcon Inc. based on the data in Requirement 2.
|
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started