Corrugated, Inc -Refer to the Figure

question 30

Multiple Choice

Corrugated, Inc. has many divisions that are evaluated on the basis of ROI. One division, the Box Division, makes boxes. The Candy Division makes candy and needs 50,000 boxes per year. The Box Division incurs the following costs for one box:
The Box Division has capacity to make 500,000 boxes per year. The Candy Division currently buys its boxes from an outside supplier for $1.40 each (the same price that the Box Division receives) .
$$\begin{array} { l r } \text { Direct materials } & \$ 0.20 \\\text { Direct labour } & 0.70 \\\text { Variable overhead } & 0.10 \\\text { Fixed overhead } & 0.23 \\\text { Total } & \$ 1.23\end{array}$$
-Refer to the Figure.Assume that Corrugated,Inc.allows division managers to negotiate the transfer price.The Box Division is producing 500,000 boxes.Suppose the Box Division and the Candy Division agree to transfer boxes.What would be the floor of the bargaining range and which division sets it?

• A)$1.23; Box Division
• B)$1.23; Candy Division
• C)$1.40; Box Division
• D)$1.40; Candy Division

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Definitions:

Recorded

The act of documenting financial transactions in the accounting records.

Controlling Interest

Ownership of a sufficient portion of a company's stock to influence or control its activities and decisions.

Valuation Allowance Account

An account used to offset the value of deferred tax assets due to the likelihood that they will not be realized.

Consolidated Financial Statements

Financial statements that present the assets, liabilities, and operating results of a parent company and its subsidiaries as one entity, providing a complete picture of the financial health of the entire corporate group.