ACTG $2$P$12$

April $17,2014$

Page $2$ of $13$

Problem $1.(15$ marks$)$

Drang and Lluvia are two divisions in Nature Corporation. Both managers are independent decision makers and are compensated based on net income. Bonuses are a substantial part of total compensation and are determined based on net income. Drang produces storms and Lluvia produces rain. It requires $20$ units of rain to produce $1$ storm. Contribution format income statements and capacity information for the two divisions from last month follow:

At the current time, the two divisions acquire all resources from third parties. The manager of Drang believes that it might be a good idea to consider purchasing her rain from Lluvia. Both managers have considered the idea. The manager of Drang has determined that she will save $$10$ per storm due to superior ability to plan and coordination information. The manager of Lluvia has determined that she will save $$2$ per unit in variable selling costs.

What is the range for a transfer price that will benefit both divisions as well as Nature Corporation?

Lluvia

$(11\mathrm{.}1-2)=9\mathrm{.}1,(19\mathrm{.}2-2)=17\mathrm{.}2$

vrang

$719\mathrm{.}2$

Prepare contribution format income statements that show the effect of a transfer price of $$15$ on each division. You may assume that last month's results are typical.

Come bols