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Des Moines Valley Company

In: Business and Management

Submitted By garett1016
Words 2254
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Transfer Pricing Q

1 of 8

Des Moines Valley Company

Des Moines Valley Company has two divisions, Computer Services and Management Advisory Services. In addition to their external customers, each division performs work for the other division. The external fees earned by each division in 19x1 were $200,000 for Computer Services and $350,000 for Management Advisory Services. Computer Services worked 3,000 hours for Management Advisory Services, who, in turn, worked 1,200 hours for Computer Services. The total costs of external services performed by Computer Services were $110,000, and $240,000 by Management Advisory Services.
Required:

a Determine the operating income for each division and for the company as a whole if the transfer price from Computer Services to Management Advisory Services is $15 per hour, and the transfer price from Management Advisory Services to Computer Services is $12.50 per hour. b Determine the operating income for each division and for the company as a whole if the transfer price from each to the other is $15 per hour. c What are the operating income results for each division and for the company as a whole if the two divisions net their hours worked for each other and charge $12.50 per hour for the one with the excess? Which division manager prefers this arrangement?

Transfer Pricing Q
Des Moines Valley Company

2 of 8
Answer

Revenue: External Internal* Total Cost of services: Incurred Transferred-in Total Operating income

Computer $200,000 $45,000 $245,000 $110,000 $15,000 $125,000 $120,000

Management $350,000 $15,000 $365,000 $240,000 $45,000 $285,000 $80,000

Company $550,000 $0 $550,000 $350,000 $0 $350,000 $200,000

* Computer Services = 3,000 hours x $15 = $45,000 Management Advisory Services = 1,200 hours x $12.50 = $15,000 Revenue for one is an expense of the other. b. Revenue: External Internal* Total...

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