NO : 3

250% of

Market

Full Cost

Price

Mining Division
Division revenues, $750, $600 x 8,000

$6,000,000

$ 4.800,000

800,000

800,000

1.600,000

1.600,000

2.400,000

2.400,000

$ 3.600,000

$ 2.400,000

$14,000,000

$14,000,000

6.000,000

4.800,000

880,000

880,000

3.400,000

3.400,000

Total division costs

10.280,000

9,080,000

Division operating income

$3,720,000

$4,920,000

Costs
Division variable costs, $100x 8,000
Division fixed costs, $200 x 8,000
Total division costs
Division operating income
Processing Division
Division revenues, $3,500 x 4,000
Costs
Transferred-in costs, $750, $600 x 8,000
Division variable cost, $220 x 4,000
Division fixed costs, $850 x 4,000

ANSWER (A) BEFORE TAX

ANSWER (B) AFTER TAX

250% of

Market

Full Cost

Price

Mining Division
Division operating income
Income tax at 25%
Division after-tax operating income

$3.600,000

$2.400,000

900,000

600,000

$2.700,000

$1.800,000

Processing Division
Division operating income
Income tax at 40%
Division after-tax operating income

$3,720,000

$4,920,000

1.488,000

1.968,000

$2,232,000

$2,952,000

ANSWER (C)The Mining Division manager would prefer 250% of full cost for the purpose of calculating a
bonus.
The Processing Division manager, would prefer market price
Due to differing tax rates, the company will pay less tax and keep more profit if they use
250% of full cost as the transfer price

ANSWER (D) - factors might Industrial Diamonds consider in choosing a transferpricing method.
Performance evaluation
Management motivation
Pricing and product emphasis
External market recognition
Overall income of the company
Income or dividend repatriation restrictions
Competitive position of subsidiaries in their respective markets