Hi Tech Electronics, Inc. manufactures electronic products, with two operating divisions, the Specialized Electronic Component and MP3 Player 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:
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Hi Tech Electronics, Inc. |
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Divisional Income Statements |
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For the Year Ended December 31, 2008 |
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Specialized Electronic |
MP3 Player |
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Component Division |
Division |
Total |
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Sales: |
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12,000 units × $126 per unit |
$1,512,000 |
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$1,512,000 |
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18,000 units × $228 per unit |
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$4,104,000 |
4,104,000 |
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$5,616,000 |
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Expenses: |
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Variable: |
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12,000 units × $86 per unit |
$1,032,000 |
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$1,032,000 |
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18,000 units × $162* per unit |
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$2,916,000 |
2,916,000 |
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Fixed |
186,000 |
432,000 |
618,000 |
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Total expenses |
$1,218,000 |
$3,348,000 |
$4,566,000 |
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Income from operations |
$ 294,000 |
$ 756,000 |
$1,050,000 |
*$126 of the $162 per case represents materials costs, and the remaining $36 per case represents other variable conversion expenses incurred within the MP3 Player Division.
The Specialized Electronic Component Division is presently producing 12,000 units out of a total capacity of 14,400 units. Materials used in producing the MP3 Player Division’s product are currently purchased from outside suppliers at a price of $126 per unit. The Specialized Electronic Component Division is able to produce the materials used by the MP3 Player 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 $126 per unit be an appropriate transfer price for Hi Tech Electronics, Inc.? Explain.
2. If the MP3 Player Division purchases 2,400 units from the Specialized Electronic Component Division, rather than externally, at a negotiated transfer price of $96 per unit, how much would the income from operations of each division and the total company income from operations increase?
3. Prepare condensed divisional income statements for Hi Tech Electronics, Inc., based on the data in part (2).
4. If a transfer price of $120 per unit is negotiated, how much would the income from operations of each division and the total company income from operations increase?
5. a. What is the range of possible negotiated transfer prices that would be acceptable for Hi Tech Electronics, Inc.?
b. Assuming that the managers of the two divisions cannot agree on a transfer price, what price would you suggest as the transfer price?