Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Slagle Corporation is a large manufacturing organization. Over the past several years, it has obtained an important component used in its production process exclusively from

Slagle Corporation is a large manufacturing organization. Over the past several years, it has obtained an important component used in its production process exclusively from Harrison, Inc., a relatively small company in Topeka, Kansas. Harrison charges $90 per unit for this part:

Variable cost per unit

$40

Fixed cost assigned per unit

30

Markup

20

Total price

$90

In hope of reducing manufacturing costs, Slagle purchases all of Harrison's outstanding common stock. This new subsidiary continues to sell merchandise to a number of outside customers as well as to Slagle. Thus, for internal reporting purposes, Slagle views Harrison as a separate profit center.

A controversy has now arisen among company officials about the amount that Harrison should charge Slagle for each component. The administrator in charge of the subsidiary wants to continue the $90 price. He believes this figure best reflects the division's profitability: "If we are to be judged by our profits, why should we be punished for selling to our own parent company? If that occurs, my figures will look better if I forget Slagle as a customer and try to market my goods solely to outsiders."

In contrast, the vice president in charge of Slagle's production wants the price set at variable cost, total cost, or some derivative of these numbers. "We bought Harrison to bring our costs down. It only makes sense to reduce the transfer price; otherwise the benefits of acquiring this subsidiary are not apparent. I pushed the company to buy Harrison; if our operating results are not improved, I will get the blame."

Will the decision about the transfer price affectconsolidatednetincome? Which method would be easiest for the company's accountant to administer? As the company's accountant, what advice would you give to these officials?

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

Managerial Accounting

Authors: Ronald W Hilton

8th Edition

0073526924, 9780073526928

More Books

Students also viewed these Accounting questions

Question

Draw a labelled diagram of the Dicot stem.

Answered: 1 week ago