Chattanooga, Incorporated, Has Two Divisions for Its Metal Fabrication Business

question 124

Essay

Chattanooga, Incorporated, has two divisions for its metal fabrication business. The Stamp Division stamps the objects and then transfers them to the Finish Division, which finishes and sells them. Last year, the Stamp Division had administrative expenses of $40,000. The Finish Division incurred additional production costs of $120,000 (exclusive of amounts paid to the Stamp Division for the stamped steel) to process 120,000 units. The Finish Division sold the finished goods for $500,000 and incurred $80,000 in variable selling and administrative expenses.
Required:
(a) Prepare income statements for each division. Use a transfer price of the Stamp Division's total cost plus 5%. Assume Cost of Goods Sold for the Finish Division is $351,000.
(b) Repeat (a), using a transfer price of $2.00 per unit; this is also the market price.
(c) Repeat (a), using a negotiated transfer price of $1.90 per unit.
(d) Which transfer price results in higher income to Chattanooga Incorporated?

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Definitions:

Self-Employed

An individual who operates a business or trade as a sole proprietor or independent contractor, responsible for their own tax filings and benefits.

Health Savings Account

A tax-advantaged saving account designed for individuals covered under high-deductible health plans to save for medical expenses.

High Deductible Health Plan

A health insurance plan with lower premiums and higher deductibles than traditional health plans, often linked with Health Savings Accounts (HSAs).

Self-Employed Individual

A person who operates their own business or works as an independent contractor, responsible for their own taxes and oftentimes their own schedule and work processes.