EXERCISE 12-15 (15 MINUTES)

1.

Division A Division B Total Com-

pany

Sales... $2,500,000 ¹ $1,200,000 ² $3,200,000 ³

Less expenses:

Added by the division... 1,800,000 400,000 2,200,000

Transfer price paid ... 500,000

Total expenses ... 1,800,000 900,000 2,200,000

Net operating income ... $ 700,000 $ 300,000 $1,000,000

1 20,000 units × $125 per unit = $2,500,000.

2 4,000 units × $300 per unit = $1,200,000.

3 Division A outside sales

(16,000 units × $125 per unit) ... $2,000,000

Division B outside sales

(4,000 units × $300 per unit) ... 1,200,000

Total outside sales... $3,200,000

Note that the $500,000 in intracompany sales has been eliminated.