Simmons Bedding Company Manufactures an Array of Bedding-Related Products, Including

question 131

Essay

Simmons Bedding Company manufactures an array of bedding-related products, including pillows. The Cover Division of Simmons makes covers, while the Assembly Division of the company produces finished pillows. The covers can be sold separately for $10.00 a piece, while the pillows sell for $12.00 per unit. For performance evaluation purposes, these two divisions are treated as investment centers. Financial results from the most recent accounting period are as follows: $$\begin{array} { | l | c | c | c | } \hline & \text { Cover Division } & \text { Assembly Division } & \\\hline \text { Traceable manufacturing costs } & \$ 6,000,000 & \$ 1,500,000 & \\\hline \text { External sales } & \$ 4,000,000 & \$ 7,200,000 & \\\hline \begin{array} { l } \text { Market value of output transferred from } \\\text { Cover Division to the Assembly Division }\end{array} & & & \$6,000,000\\\hline\end{array}$$ Required:
1. What is the operating income for each of the two divisions and for the company as a whole? (Use market value as the transfer price.)
2. Do you think each of the two divisional managers is happy with this transfer pricing method? Explain.

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Definitions:

Analyzing Transactions

The process of reviewing and scrutinizing financial transactions to ensure they are correctly recorded in the accounting records.

Ledger

A comprehensive collection of a company's financial accounts, transactions, and balances.

Current Liabilities

Financial liabilities scheduled for payment within a year or the regular business cycle.

Current Assets

Assets that are expected to be converted into cash, sold, or consumed within a year.