Transfer pricing

Garcon Inc. manufactures electronic products, with two operating divisions, Consumer and Commercial. 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, 20Y2
	Consumer Division			Commercial Division		Total
Sales:
14,400 units $144 per unit		$2,073,600				$2,073,600
21,600 units $275 per unit				$5,940,000		5,940,000
Total sales		$2,073,600		$5,940,000		$8,013,600
Expenses:
Variable:
14,400 units $104 per unit		$(1,497,600)				$(1,497,600)
21,600 units $193* per unit				$(4,168,800)		(4,168,800)
Fixed		(200,000)		(520,000)		(720,000)
Total expenses		$(1,697,600)		$(4,688,800)		$(6,386,400)
Operating income		$376,000		$1,251,200		$1,627,200
*$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.? No

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 operating income of each division and the total company operating income increase?

The Consumer Division's operating income would increase by $

The Commercial Division's operating income would increase by $

Garcon Inc.'s total operating income would increase by $

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1. When divisions transfer products or renders services to each other, a transfer price is used to charge for the product or service. transfer prices affect a division's financial performance. Transfer prices can be set as low as the variable cost per unit or as high as the market price. Consider when unused capacity exists in the supplying division.

2. Determine what "difference" should be computed for the Consumer division, the Commercial division, and Garcon Inc. Is it the difference between the transfer price and variable cost, or the market price and variable cost, or the market price and transfer cost. Then, multiply the difference by the units transferred.

3. Prepare condensed divisional income statements for Garcon Inc. based on the data in part (2).

Garcon Inc.
Divisional Income Statements
For the Year Ended December 31, 20Y2
	Consumer Division	Commercial Division	Total
Sales:
14,400 units	$		$
2,880 units
21,600 units		$
Total sales	$	$	$
Expenses:
Variable:
17,280 units	$		$
2,880 units		$
18,720 units
Fixed
Total expenses	$	$	$
Operating income	$	$	$

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Correct

4. If a transfer price of $126 per unit is negotiated, how much would the operating income of each division and the total company operating income increase?

The Consumer Division's operating income would increase by $

The Commercial Division's operating income would increase by $

Garcon Inc.'s total operating income would increase by $

5a. What is the range of possible negotiated transfer prices that would be acceptable for Garcon Inc.?

Any transfer price greater than the Consumer Divisions variable expenses per unit but less than the market price would be acceptable.

5b. Assuming that the managers of the two divisions cannot agree on a transfer price, what price would you suggest as the transfer price? $