(Transfer Pricing, Special Orders) The India Company manufactures handmade Persian rugs. Within the India Company, there are two divisions: the Dye Division makes dyes and colours the wool, while the Weaving Division hand weaves each rug. The dyed wool can be sold to outside companies for a price of $20 per kilogram. The finished rugs sell for $1,000 each, and 10 kg of wool are used to make each rug. The following information relates to operations of the India Company for 2011:
|
Number of rugs sold in 2011 |
2,000 |
|
Wool sold to external parties |
30,000 kg |
|
Wool sold internally to Weaving Division |
20,000 kg |
|
Capacity of Dye Division |
60,000 kg |
|
Dye Division: Direct material costs |
$4 per kg |
|
Dye Division: Direct labour costs |
$1 per kg |
|
Weaving Division: Direct material costs |
$50 per rug |
|
Weaving Division: Direct labour costs |
$300 per rug |
|
Fixed costs |
$600,000 |
- Calculate the operating income for each division and for the company as a whole. Use market value as the transfer price.
- If a special order of 20,000 kg of dyed wool was received from an external party during the year at a price of $15 per kg, should the company accept this order?
- What other factors need to be considered, outside of profits?