Sba Assignment Transfer Pricing

SBA ASSIGNMENT TRANSFER PRICING
i1. The following selected data relate to the Idaho Division of Far West Enterprises (FWE):
Sales revenue P4,580,000

Uncontrollable fixed costs traceable to the division 1,360,000
Allocated corporate overhead 590,000
Controllable fixed costs traceable to the division 1,120,000
Variable costs 40% of revenue
Required:
A. Compute the following for the Idaho Division:
1. Segment contribution margin.
2. Controllable profit margin.
3. Segment profit margin.
B. Which of the three preceding measures should be used when evaluating the Idaho Division as an investment of FWE's resources?
Why?
C. Assume that management made the decision to prepare a segmented income statement that reflected Idaho's five operating
departments. Would all P1,120,000 of the controllable fixed costs be easily traced to the departments? Briefly explain.
ii2.
The Electric Division of Ecological Products Co. has developed a wind generator that requires a special "S" ball bearing. The Ball Bearing
Division of Ecological Products Co. has the capability to produce such a ball bearing.
Unfortunately, the Ball Bearing Division is operating at capacity and will need to reduce production of another existing product, the "T" bearing, by
1,000 units per month to provide the 600 "S" bearings needed each month by the Electric Division. The "T" bearing currently sells for P50 per unit.
Variable costs incurred to produce the "T" bearing are P30 per unit; variable costs to produce the new "S" bearing would be P60 per unit.
The Electric Division has found an external supplier that would furnish the needed "S" bearings at P100 per unit. Assume that both the Electric
Division and Ball Bearing Division are independent, autonomous investment centeP.
1. Refer to Ecological Products Co. What is the maximum price per unit that Electric Division would be willing to pay the Ball Bearing Division for the
"S" bearing?
2. Refer to Ecological Products Co. What is the minimum price that Ball Bearing Division would consider to produce the "S" bearing?
3. Refer to Ecological Products Co. What is the minimum price that Ball Bearing Division would consider to produce the "S" bearing if the Ball
Bearing Division did not need to forfeit any of its existing sales to produce the "S" bearing?
4. Refer to Ecological Products Co. What factoP besides price would Electric Division want to consider in deciding where it will purchase the
bearing?
iii3.
The Wire Products Division of Sulphur Steel Corporation produces "bales" of steel wire that are used in various commercial applications. The
bales sell for an average of P20 each and The Wire Products Division has the capacity to produce 10,000 bales per month. The Consumer Products
Division of Sulphur Steel Corporation uses approximately 2,000 bales of steel wire each month in its production of various appliances. The operating
information for the Wire Products Division at its present level of operations (8,000 bales per month) follows:
Sales (all external) P160,000

Variable costs per bale:
Production P5
Selling 2
G&A 3
Fixed costs per bale (based on a 10,000 unit capacity):
Production P2
Selling 3
G&A 4
The Consumer Products Division currently pays P15 per bale for wire obtained from its external supplier.
a. Refer to Sulphur Steel Corporation. If 2,000 bales are transferred in one month to the Consumer Products Division at P10 per bale, what
would be the profit/loss of the Wire Products Division?
b. Refer to Sulphur Steel Corporation. For the Wire Products Division to operate at break-even level, what would it need to charge for the
production and transfer of 2,000 bales to the Consumer Products Division? Assume all variable costs indicated will be incurred by the Wire
Products Division.
c. Refer to Sulphur Steel Corporation. If Wire Products Division transferred 2,000 wire bales to the Consumer Products Division at 200
percent of full absorption cost, what would be the transfer price?
d. Refer to Sulphur Steel Corporation. If the Consumer Products Division agrees to pay the Wire Products Division P16 for 2,000 bales this
month, what would be Consumer's change in total profits?
e. Refer to Sulphur Steel Corporation. Assuming, for this question only, that the Wire Products Division would not incur any variable G&A
costs on internal sales, what is the minimum price that it would consider accepting for sales of bales to the Consumer Products Division?
Transfer Pricing 1|P a g e

iv4.
The Carpet Division of Floor Products Corporation manufactures a single grade of residential grade carpeting. The division has the capacity to
produce 500,000 square yards of carpet each year. Its current costs and revenues are shown here:
Sales (400,000 square yards) P2,000,000

Variable costs per square yard:
Production P2.00
SG&A 1.00
Fixed costs per square yard (based on 500,000 yard capacity)
Production P0.50
SG&A 1.00
The Housing Division currently purchases 40,000 yards of carpeting (of the grade produced by the Carpet Division) each year at a cost of P6.50 per
square yard from an outside vendor.
a. Refer to Floor Products Corporation. If the autonomous Housing and Carpet Divisions enter negotiations on the internal transfer of 40,000
square yards of carpeting, what is the maximum price that will be considered?
b. Refer to Floor Products Corporation. If the autonomous Housing and Carpet Divisions enter negotiations on the internal transfer of 40,000
square yards of carpeting, what is the Carpet Division's minimum price?
c. Refer to Floor Products Corporation. If the Housing and Carpet Divisions agree on the internal transfer of 40,000 square yards of carpet at a
price of P4.50 per square yard, how will the profits of the Housing Division be affected?
d. Refer to Floor Products Corporation. If the Housing and Carpet Divisions agree on the internal transfer of 40,000 square yards of carpet at a
price of P4.00 per square yard, how will overall corporate profits be affected?
e. Refer to Floor Products Corporation. Assume, for this question only, that the Carpet Division is producing and selling 500,000 square yards of
carpet to external buyeP at a price of P5 per square yard. What would be the effect on overall corporate profits if Carpet Division reduces
external sales of carpet by 40,000 square yards and transfeP the 40,000 square yards of carpet to the Housing Division?
Transfer Pricing 2|P a g e

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SBA ASSIGNMENT TRANSFER PRICING

Sales revenue P4,580,000

Sales (all external) P160,000

Transfer Pricing 1|P a g e

Sales (400,000 square yards) P2,000,000

Transfer Pricing 2|P a g e

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