PROBLEM 3: TRANSFER PRICING

Garcon Inc. manufactures electronic products, with two operating divisions, the Consumer and
Commercial divisions. Condensed divisional income statement, 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, 2021

Consumer Commercial Division

DivisionTotal

$2,073,600 $5,940,000 $8,013,600

$1,497,600 $1,497,600
$4,168,800 $4,168,800

200,000 520,000 720,000

$1,697,600 $4,688,800 $6,386,400
$376,000 $1,251,200 $1,627,200
Sales

14,400 units @ $144 per unit $2,073,600 $2,073,600

21,600 units @$275 per unit $5,940,000 $5,940,000

Expenses:
3. Prepare condensed divisional income statements for Garcon Inc. based on the data in part (2)
4. If a transfer price of $126 per u nit is negotiated, how much would the income form operations
of each division and the total company income from operations increase?
5. a. What is the range of possible negotiated transfer prices that would be acceptable for Garcon
Inc.?

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