Part A-7 marks
(i) Compare the different transfer-pricing methods using any one of the criteria - achieves goal
congruence, motivates management effort, useful for evaluating subunit performance, preserves
subunit autonomy or other factors.
(2 marks)
(ii)
Cornerstone Company has two divisions. The Bottle Division produces products that have
variable costs of $3 per unit. Its 20X5 sales were 140,000 to outsiders at $5 per unit and 40,000
units to the Mixing Division at 140% of variable costs. Under a dual transfer-pricing system, the
Mixing Division pays only the variable cost per unit. The fixed costs of the Bottle Division are
$125,000 per year.
Mixing sells its finished products to outside customers for $11.50 per unit. Mixing has variable
costs of $2.50 per unit in addition to the costs from the Bottle Division. The annual fixed costs of
Mixing were $85,000. There were no beginning or ending inventories during the year.
Required:
a) Determine the operating incomes of the two divisions and the company as a whole for the
year.
(4 marks)
b) Briefly explain why the company's operating income is less than the sum of the two divisions'
total income.
(1 mark)