Transfer Pricing

Pendray Scientific Inc. manufactures electronic products, with two operating divisions, the GPS Systems and Communication Systems divisions. Condensed divisional income statements, which involve no intracompany transfers and which include a breakdown of expenses into variable and fixed components, are as follows:

Pendray Scientific Inc. Divisional Income Statements For the Year Ended December 31, 20Y5
	GPS Systems Division			Communication Systems Division			Total
Sales:
90,000 units @ $60 per unit	$5,400,000						$5,400,000
150,000 units @ $115 per unit				$17,250,000			17,250,000
	$5,400,000			$17,250,000			$22,650,000
Expenses:
Variable:
90,000 units @ $43 per unit	$3,870,000						$3,870,000
150,000 units @ $90 per unit				$13,500,000			13,500,000
Fixed	250,000			500,000			750,000
Total expenses	$4,120,000			$14,000,000			$18,120,000
Income from operations	$1,280,000			$3,250,000			$4,530,000

The GPS Systems Division is presently producing 90,000 units out of a total capacity of 150,000 units. Materials used in producing the Communication Systems Division's product are currently purchased from outside suppliers at a price of $60 per unit. The GPS Systems Division is able to produce the materials used by the Communication Systems Division. Except for the possible transfer of materials between divisions, no changes are expected in sales and expenses.

Instructions:

1. Would the market price of $60 per unit be an appropriate transfer price for Pendray Scientific Inc.? SelectYesNoCorrect 1 of Item 1

2. If the Communication Systems Division purchases 25,000 units from the GPS Systems Division, rather than externally, at a negotiated transfer price of $52 per unit, how much would the income from operations of each division and the total company income from operations increase?

The GPS Systems Division's income from operations would increase by $

The Communication Systems Division's income from operations would increase by $

Pendray Scientific Inc.'s total income from operations would increase by $

4. If a transfer price of $49 per unit is negotiated, how much would the income from operations of each division and the total company income from operations increase?

The GPS Systems Divisions income from operations would increase by $

The Communication Systems Division's income from operations would increase by $

Pendray Scientific Scientific Inc.'s total income from operations would increase by $

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

Between $ and $

5b. Assuming that the managers of the two divisions cannot agree on a transfer price, what transfer price would represent the best compromise?

3. Prepare condensed divisional income statements for Pendray Scientific Inc. based on the data in part (2) Enter all amounts as positive numbers Pendray Scientific, Inc. Divisional Income Statements For the Year Ended December 31, 20Y5 GPS Systems Communication Systems Total Sales: 90,000 units 25,000 units 150,000 units Expenses: Variable: 115,000 units 25,000 units 125,000 units Fixed 5 Total expenses Income from operations