Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

P11-37 Transfer Pricing with and without Capacity Constraints Elise Carpets Inc. has just acquired a new bacing diviion that produces a rubber backing, which it

P11-37 Transfer Pricing with and without Capacity Constraints

Elise Carpets Inc. has just acquired a new bacing diviion that produces a rubber backing, which it sells for $3.30 per square yard. Sales are about 1,200,000 square yards per year. Since the Backing Division has a capacity of 2,000,000 square yards, top management in thinking that it might be wise for the company's Tufting Division to start purchasing from the newly acquired Backing Division. The Tufting Division now purchases 600,000 square yards per year from an outside supplier at a price of $3.30 per square yard. The current price is lower than the competitive $3.30 price as a result of the large quantity discounts. The Backing Division's cost per square yard follows.

Direct materials $ 1.80

Direct labor 0.45

Variable overhead 0.15

Total cost $ 2.77

If both divisions are to be treated as investment centers and their performance

evaluated by the ROI formula, what transfer price would you recommend? Why?

If fixed cost are assumed not to change, determine the effect on corporate profits of

making the backing. Based on your transfer price, would you expect the ROI in the Backing Division to increase, decrease, or remain unchanged. Explain.What would be the effect on the ROI of the Tufting Division using your transfer price? Explain. Assume that the Backing Division is now selling 2,000,000 square yards per year to retail outlets. What transfer price would you recommend? What will be the effect on corporate profits?

If the Backing Division is at capacity and decides to sell to the Tufting Division for $3.00 per square yard, what will be the effect on the company's profits?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Accounting Fundamentals

Authors: John Wild

7th Edition

1260247864, 9781260247862

More Books

Students also viewed these Accounting questions

Question

How do you add two harmonic motions having different frequencies?

Answered: 1 week ago