Stellar Systems Company's Microprocessor Division sells a computer module to the company's Guidance Assembly Division, which assembles completed guidance systems. The Microprocessor Division is operating at full capacity. The computer module has variable costs of $10000, and it can be sold in the external market to companies in the computer industry for $13500

Required:

1.Calculate the transfer price for the computer module using the general transfer pricing rule.

2.How would your solution change if the Microprocessor Division had spare capacity?

Exercise 1

Sparky Electrical Services is organised into three divisions: Metro, Suburban and Regional. Data for these divisions for last year were as follows:

Metro

Suburban

Regional

Service revenue

$950000

$750000

$350000

Variable expenses

150000

100000

50000

Controllable fixed expenses

350000

270000

100000

Fixed expenses controllable by others

180000

150000

40000

In addition to the expenses listed above, the company had $45000 of common fixed costs last year that were not attributable to the three divisions. Income tax expense for the year was $245000.

Required:

Prepare a profit statement for Sparky Electrical Services that highlights the profitability/ performance of the three business units and the business unit mangers. Use the contribution format.

Exercise 2

Part A: Green Energy Ltd has two divisions: Assembly and Electrical. The Assembly Division transfers partially completed components to the Electrical division at a predetermined transfer price. The Assembly divisions standard variable production cost per unit is $300. This division has spare capacity, and it could sell all its components to outside buyers at $380 per unit in a perfectly competitive market.

Required:

1.Determine a transfer price using the general rule.

2.How would the transfer price change if the Assembly Division has no spare capacity?

3.What transfer price would you recommend if there was no outside market for the transferred component, and the Assembly Division had spare capacity?

Part B: Assume the Assembly Division's absorption cost of component is $340, which included $40 of applied fixed overhead costs. The transfer price has been set at $374, which is the Assembly Division's absorption cost plus a 10% mark up.

The Electrical Division has a special offer of $465 for its product. The Electrical Division incurs variable costs of $100 in addition to the transfer price for Assembly Division's components. Both divisions currently have spare production capacity.

Required:

1.Is the Electrical Division manager likely to want to accept or reject the special offer? Why?

2.Is this decision in the best interests of Green Energy Ltd as a whole? Explain.

3.How could the situation be remedied using transfer price?