Financial and Managerial Accounting: PR24-6A Eccles, Inc., manufactures electronic products

Financial and Managerial Accounting
PR24-6A Transfer Pricing
Eccles, Inc., manufactures electronic products, with two operating divisions, the Electronics and Instruments 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:
Eccles, Inc.
Divisional Income Statements
For the Year Ended December 31, 2012
Electronics Division Instruments Division
Total Sales: 12,000 units @ $120 per unit 1,440,000 1,440,000 18,000 units @ $228 per unit 4,104,000 4,104,000 1,440,000 4,104,000 5,544,000
Expenses:
Variable: 12,000 units @ $86 per unit 1,032,000 1,032,000 18,000 units @ $162* per unit 2,916,000 2,916,000
Fixed: 168,000 432,000 600,000
Total Expenses 1,200,000 3,348,000 4,548,000
Income from Operations $240,000 $756,000 $996,000 * $126 of the $162 per unit represents materials costs, and the remaining $36 per unit represents other variable conversion expenses incurred within the Instruments Division.
The Electronics Division is presently producing 12,000 units out of a total capacity of 14,400 units. Materials used in producing the Instruments Division's product are currently purchased from outside suppliers at a price of $126 per unit. The Electronics Division is able to produce the materials used by the Instruments 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 $126 per unit be an appropriate transfer price for Eccles, Inc.? Explain.
2. If the Instruments Division purchases 2,400 units from the Electronics 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? The Electronics Division's income from operations would increase by The Instruments Division's income from operations would increase by Eccles, Inc.'s total income from operations would increase by
3. Prepare condensed divisional income statements for Eccles, Inc., based on the data in part (2).
4. If a transfer price of $105 per unit is negotiated, how much would the income from operations of each division and the total company income from operations increase? The Electronics Division's income from operations would increase by The Instruments Division's income from operations would increase by Eccles, Inc.'s total income from operations would increase by
5a. What is the range of possible negotiated transfer prices that would be acceptable for Eccles, 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?
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