Branded Shoe Company manufactures only one type of shoe and has two divisions, the Stitching Division and the Polishing Division. The Stitching Division manufactures shoes for the Polishing Division, which completes the shoes and sells them to retailers. The Stitching Division "sells" shoes to the Polishing Division. The market price for the Polishing Division to purchase a pair of shoes is $43. (Ignore changes in inventory.) The fixed costs for the Stitching Division are assumed to be the same over the range of 40,000−102,000 units. The fixed costs for the Polishing Division are assumed to be $23 per pair at 102,000 units.
Stitching's costs per pair of shoes are:
Direct materials $17
Direct labor $15
Variable overhead $13
Division fixed costs $11
Polishing's costs per completed pair of shoes are:
Direct materials $20
Direct labor $7
Variable overhead $7
Division fixed costs $17
Calculate and compare the difference in overall corporate net income of Branded Shoe Company between Scenario A and Scenario B if the Assembly Division sells 102,000 pairs of shoes for $122 per pair to customers.
Scenario A: Negotiated transfer price of $37 per pair of shoes
Scenario B:
Market−based
transfer price
A.$2,142,000 less net income using Scenario A.
B.$612,000 less net income using Scenario B
C.$612,000 more net income under Scenario A
D.The net income would be the same under both scenarios.
