35 - TP) 50,000 - $780,000 $0
× >
($35 - TP) 50,000 $780,000
($35 - TP) $15.60
>
TP $19.40
<
Therefore, any transfer price that is less than $19.40 will result in an in-
crease in the Consumer Product Division’s residual income if the sorbet
maker product is launched.
Group Exercise 12-37 (continued)
On the other hand, from the standpoint of the Industrial Products Divi-
sion, selling the electric motor to the Consumer Products Division will make
sense only if the Industrial Products Division’s residual income is increased.
This will occur if and only if:
Residual income from selling the electric motor $0
Contribution margin - Fixed cost - Minimum required return $0
(TP - $13) 50,000 - $30,000 - 0.20 $400,000 $0
× × >
(TP - $13) 50,000 - $30,000 - $80,000 $0
(
TP - $13) 50,000 $110,000
(TP - $13) $2.20
TP $15.20
Therefore, any transfer price in excess of $15.20 will result in an increase
in the Industrial Product Division’s residual income if the sorbet maker
product is launched.
Combining the two requirements, any transfer price within the range
$15.20 < TP < $19.40 will result in an increase in both Divisions’ residual
incomes. Therefore, the two groups should be able to come to a mutually
satisfactory agreement.
However, they may fail to come to an agreement. This could occur for a
number of reasons, just as in the real world. They may not be able to fig-
ure out what is in their own best interests. They may get caught up in the
negotiations and lose sight of their goal—which should be to maximize re-
sidual income. Or negotiations may break down over fairness and equity
issues.
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