The following table presents the performance of two divisions—Division A and Division B—of a company. Division A supplies an intermediate product to Division B. Although there is an outside market for Division A’s product, it does not sell its product to the outside market.

Required:

a. Assume that the transfer price is 110% of Division A’s full cost. Prepare an income statement for each division.

b. Assume that the transfer price is 120% of Division A’s variable cost. Prepare an income statement for each division.

c. Assume that the transfer price is the market price. If Division A could sell its entire output in the intermediate market, it would realize revenues of $8,000,000. Prepare an income statement for each division.

d. What conclusions do you draw from comparing your answers? Under what conditions would you recommend the transfer-pricing schemes in requirements in parts (a), (b), and (c) above

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Division A Division B $12,500,000 Revenues Direct material costs $2,500,000 $2,000,000 $500,000 $1,600,000 $6,600,000 $1,800,000* $1,500,000 $375,000 $1,200,000 $4,875,000 Direct labor Variable overhead Fixed overhead Total * Does not include the cost of transfer from Division A.