Reference no: EM132790898

Nogo Motors, Inc., has several divisions that often purchase component parts from each other. The company is fully decentralized and each division is selling to other divisions or in outside markets. Each division makes its decision on where to buy and sell in conformity with divisional goals. Igo Division purchases most of its airbags from Letgo Division. The managers of these two divisions are currently negotiating a transfer price for the airbags for next year, when the airbag will be standard equipment on all Igo vehicles.

Letgo Division prepared the following financial information for negotiating purposes:

Costs of airbag as manufactured by Letgo:

Direct materials costs P 40
Direct manufacturing labor costs 55
Variable manufacturing overhead costs 10
Fixed manufacturing overhead costs 25
Variable marketing costs 5
Fixed marketing costs 15
Fixed administrative costs 10
Total costs P 160

• Letgo Division is currently working at 80% of its capacity. Letgo's policy is to achieve an operating income of 20% of sales.
• There has been a drop in price for airbags. The current market price is P 130 per unit.

Required: Consider each of the requirements independently.

Problem 1. If Letgo Division desires to achieve it's operating income goal of 20% of sales, what should be the transfer price?

Problem 2. Assume that Letgo Division wants to maximize its operating income, what transfer price would you recommend that the Letgo Division negotiate?

Problem 3. What is the transfer price that you believe Letgo Division should charge if overall company-operating income is to be maximized?