Pendray Scientific Inc. manufactures electronic products, with two operating divisions, the GPS Systems and Communication Systems Divisions. Condensed divisional income statements, which involve no intracompany transfers and which include a breakdown of expenses into variable and fixed components, are as follows:

The GPS Systems Division is presently producing 75,000 units out of a total capacity of 100,000 units. Materials used in producing the Communication Systems Division’s product are currently purchased from outside suppliers at a price of $60 per unit. The GPS Systems Division is able to produce the materials used by the Communication Systems Division. Except for the possible transfer of materials between divisions, no changes are expected in sales and expenses.

Instruction
1. Would the market price of $60 per unit be an appropriate transfer price for Pendray Scientific Inc.? Explain.
2. If the Communication Systems Division purchases 25,000 units from the GPS Systems Division, rather than externally, at a negotiated transfer price of $52 per unit, how much would the income from operations of each division and the total company income from operations increase?
3. Prepare condensed divisional income statements for Pendray Scientific Inc. based on the data in part (2).
4. If a transfer price of $49 per unit is negotiated, how much would the income from operations of each division and the total company income from operations increase?
5. a. What is the range of possible negotiated transfer prices that would be acceptable for Pendray Scientific Inc.?
b. Assuming that the managers of the two divisions cannot agree on a transfer price, what price would you suggest as the transferprice?

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Pendray Scientific, Inc. Divisional Income Statements For the Year Ended December 31, 2012 GPS Systems Division Communication Systems Division Total Sales: 75,000 units$60 per unit 140,000 units $115 per unit 4,500,000 16,100,000 $20,600,000 4,500,000 $16,100,000 16,100,000 $4,500,000 Expenses: Variable: 3,000,000 12,600,000 750,000 16,350,000 4,250,000 75,000 units $40 per unit $3,000,000 140,000 units $90* per unit Fixed Total expenses 250,000 $3,250,000 $1.250,000 12,600,000 500,000 $13,100,000 5 3,000,000 Income from operations S60 of the $90 per unit represents materials costs, and the remaining $30 per unit represents other variable conversion expenses incurred within the Communication Systems Division.