Ryan Company that has two divisions M & N. Product X is manufactured in US and sold domestically and to division N in France as well. A total of 900 units of X is produced and sold at $410 a unit in the U.S. Division N requires 300 units of X. Ryan Company has a total capacity of 1200 units. The company estimates the cost to be $190 in variable costs per unit with a total fixed cost of $72,000. Selling and administration expense in the U.S. comes to $90,000 including sales commissions at 5% of domestic sales. Shipping cost to N (payable by N) amounts to $3,600. Division N packages the item and puts a label on it at a cost of $32 a unit and sells it for $560 a unit. It incurs a promotional and administrative cost amounting to $15,000. The income tax rate in the U.S. is 30% and it is 50% in France.
a) Determine the divisional and company net income if the transfer price is set at the market price.
b) Determine the divisional and company net income if the transfer price is set at total cost.
c) Determine the divisional and company net income if the transfer price is set at variable cost.
d) Would it be to the company's advantage to buy from an outsider rather than produce N's requirement if an outsider can sell the item to N for $220 a unit? Show your computations.
The solution explains how to calculate the net income at various transfer prices