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Gascon Inc. manufactures electronic products, with two operating divisions, Consumer and...

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Gascon Inc. manufactures electronic products, with two operating divisions, Consumer and Commercial divisional income statements, which involve no intracompany transfers and which include a breakdown of expenses into variable and fixed components, are as follows:

Garcon Inc. Divisional Income Statements For the Year Ended December 31, 20Y2

Consumer DivisionCommerical DivisionTotal
Sales
14,400 units x $144 per unit$2,073,600.00 $2,073,600.00
21,600 units x $275 per unit $5,940,000.005,940,000.00
Total sales$2,073,600.00$5,940,000.00$8,013,600.00
Expenses
Variable
14,400 units x $104 per unit$1,497,600.00 $1,497,600.00
21,600 units x $193* per unit $4,168,800.004,168,800.00
Fixed 200,000.00520,000.00720,000.00
Total expenses$1,697,600.00$4688,800.00$6,386,400.00

(*) $150 of the $193 per unit represents materials costs, and the remaining $43 per unit represents other variable conversion expenses incurred within the Commercial Division.

The Consumer Division is presently producing 14,400 units out of a total capacity of 17,280 units. Materials used in producing the Commercial Division's product are currently purchased by outside suppliers at a price of $150 per unit. The Consumer Division is able to produce the materials used by the Commercial Division. Except for the possible transfer of materials between divisions, no changes are expected in sales and expenses.


Required

1. Would the market price of $150 per unit be an appropriate transfer price for Gascon Inc? Explain.

2. If the Commercial Division purchases 2,880 units from the Consumer Division, rather than externally, at a negotiated transfer price of $115 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 Gascon Inc. based on the data in Requirement 2.

4. If a transfer price of $126 per unit is negotiated, how much would the income from operations of each division and the total company income from operations increase?

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

5b. Assuming that the managers of the two divisions cannot agree on a transfer price, what price would you suggest as the transfer price?

Transfer Pricing:

Transfer prices refer to the prices set for internal sales transactions, that is to say transactions where two divisions of the same company buy and sell goods from each other. These prices should be set so that both divisions and the company as a whole benefit.

Answer and Explanation: 1

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1. The market price of $150 per unit is only relevant in the negotiation, in that the management of the Commercial division will not b willing to...

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Negotiated Transfer Pricing: Definition & Examples

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Chapter 10 / Lesson 6
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Negotiated transfer pricing is where company representatives negotiate prices themselves, not basing purely on market prices. Learn several advantages and disadvantages to using negotiated transfer pricing demonstrated through two companies' negotiations.


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