United Management has a divisionalized structure. Division B has encountered an opportunity to…
United Management has a divisionalized structure. Division B has encountered an opportunity to provide specialized manufacturing for an established customer. The customer will pay 100. The catch is divisions A and B will both have to contribute manufacturing resources. A will do the preliminary work and then transfer the semifinished product to B, and B will then complete the manufacturing and deliver the item to the customer. The cost will total 60, with 50 incurred in division A and 10 in division B. The transfer price, from B to A, is set at the amount T.
(a) Assume the opportunity is taken. Determine the incremental profit (i) to the firm; (ii) to division A; and (iii) to division B.
(b) Provide journal entries on division A’s books to record all activity associated with this opportunity. Include entries for work in process, cost of goods sold, revenue, and so on. (Do not close any temporary accounts.) For convenience, assume all cost incurred by A is associated with cash expenditures.
(c) Do the same for division B’s books.
(d) When Ralph, an employee of United Management, prepares consolidated financial statements, will the consolidation process, working from your above entries, result in a firm-wide incremental profit that agrees with your answer in (a)? Explain.