The fixed overhead for Division C is $1,200,000. include a table similar the one below to compute the difference between the current situation and the proposal for Divisions A and B.

? Compute the operating income for Division C under the current agreement and the proposed agreement. ? Is the revised agreement a good idea? Support your answer with computations.

Memo to the division manager explaining the analysis performed. Start with an introduction and end with a recommendation. Start with an introduction and end with a summary or conclusion. Evaluate and discuss the implications of the following transfer pricing policies: ? Transfer price = cost plus a mark-up for the selling division ? Transfer price = fair market value ? Transfer price = price negotiated by the managers Why is transfer pricing such a significant issue both from a financial and managerial perspective?

Coffee Maker's Incorporated (CMI) . 2,000 units from an external supplier at the market price of $900 per unit. Three divisions of a CMI are involved in a dispute. Division A purchases Part 101 and Division B . Division B will buy 900 units of Part 201 from Division C at the existing transfer price; and purchases Part 201 from a third division, C. Both divisions need the parts for products that they assemble. The intercompany transactions have remained constant for several years. * 900 units from an external supplier at $1,800 per unit. Recently, outside suppliers have lowered their prices, but Division C refuses to do so. In Division C Data Based on the Current Agreement addition, all division managers are feeling the pressure to increase profit. Managers of divisions Part 101 102 A and B would like the flexibility to purchase the parts they need from external parties at a lower cost and increase profitability. Annual volume [units) |2,700 1,080 Transfer pricefanit $1,100 $2,100 The current pattern is that Variable expenses/unit $750 $1,100 . Division A purchases 2,700 units of product part 101 from Division C (the supplying division) and another 1,300 units from an external supplier. The fixed overhead for Division C is $1,200,000. . Division B purchases 1,100 units of Part 201 from Division C and another 700 units from . Set up a table similar the one below to compute the difference between the current an external supplier. situation and the proposal for Divisions A and B. Division A . Note that both divisions A and B purchase the needed supplies from both the internal source and an external source at the same time. Current Situation Proposal No. of Units Purchase Price Total Purchases No. of Units Purchase Price Total Purchases The managers for divisions A and B are preparing a new proposal for consideration. Internal purchases 2,700 2,000 . Division C will continue to produce Parts 101 and 201. All of its production will be sold to External purchases 1,300 2,000 Divisions A and B. No other customers are likely to be found for these products in the short term, given that supply is greater than demand in the market. Total cost for Part 101 $ Savings to DIM. A S . Division A will buy 2,000 units of Part 101 from Division C at the existing transfer price; and