Accounting:Consolidated Financial Statements - Intra - Entity Assets Transaction

May 1st, 2015
KateS
Category:
Accounting
Price: $15 USD

Question description

Discussion 5.1: What Price Should We Charge Ourselves?

Slagle Corporation is a large manufacturing organization. Over the past several years, it has obtained an important component used in its production process exclusively from Harrison, Inc., a relatively small company in Topeka, Kansas. Harrison charges $90 per unit for this part:

Variable cost per unit

$40

Fixed cost assigned per unit

$30

Markup

$20

Total

$90

In hope of reducing manufacturing costs, Slagle purchases all of Harrison's outstanding common stock. This new subsidiary continues to sell merchandise to a number of outside customers as well as to Slagle. Thus, for internal reporting purposes, Slagle views Harrison as a separate profit center.

A controversy has now arisen among company officials about the amount that Harrison should charge Slagle for each component. The administrator in charge of the subsidiary wants to continue the $90 price. He believes this figure best reflects the division's profitability: “If we are to be judged by our profits, why should we be punished for selling to our own parent company? If that occurs, my figures will look better if I forget Slagle as a customer and try to market my goods solely to outsiders.”

In contrast, the vice president in charge of Slagle's production wants the price set at variable cost, total cost, or some derivative of these numbers. “We bought Harrison to bring our costs down. It only makes sense to reduce the transfer price; otherwise the benefits of acquiring this subsidiary are not apparent. I pushed the company to buy Harrison; if our operating results are not improved, I will get the blame.”

Will the decision about the transfer price affect consolidated net income? Which method would be easiest for the company's accountant to administer? As the company's accountant, what advice would you give to these officials?


Tutor Answer

(Top Tutor) Daniel C.
(997)
School: UT Austin
PREMIUM TUTOR

Studypool has helped 1,244,100 students

8 Reviews


Summary
Quality
Communication
On Time
Value
Five Star Tutor
Dec 5th, 2016
" Outstanding Job!!!! "
SjSurvivor143
Nov 20th, 2016
" Thanks for the help. "
Joemoe
Nov 6th, 2016
" <3 it, thanks for saving me time. "
tinytim47
Oct 28th, 2016
" Wow this is really good.... didn't expect it. Sweet!!!! "
pmallory
Oct 24th, 2016
" Totally impressed with results!! :-) "
mixedballz
Oct 15th, 2016
" excellent work as always thanks for the help "
kiln82
Oct 1st, 2016
" awesome work thanks "
darnay
Sep 22nd, 2016
" The best tutor out there!!!! "
Ask your homework questions. Receive quality answers!

Type your question here (or upload an image)

1829 tutors are online

Brown University





1271 Tutors

California Institute of Technology




2131 Tutors

Carnegie Mellon University




982 Tutors

Columbia University





1256 Tutors

Dartmouth University





2113 Tutors

Emory University





2279 Tutors

Harvard University





599 Tutors

Massachusetts Institute of Technology



2319 Tutors

New York University





1645 Tutors

Notre Dam University





1911 Tutors

Oklahoma University





2122 Tutors

Pennsylvania State University





932 Tutors

Princeton University





1211 Tutors

Stanford University





983 Tutors

University of California





1282 Tutors

Oxford University





123 Tutors

Yale University





2325 Tutors