Garcon Inc. manufactures electronic products, with two operating divisions, Consumer and Commercial. Condensed divisional income statements, which involve no intracompany transfers and which include a breakdown of expenses into variable and fixed components, are as follows:
Garcon Inc.
Divisional Income Statements
For the Year Ended December 31, 20Y2
1. Consumer Division Commercial Division Total
2. Sales:
3. 14,400 units × $144 per unit $2,073,600.00 $2,073,600.00
4. 21,600 units × $275 per unit $5,940,000.00 5,940,000.00
5. Total sales $2,073,600.00 $5,940,000.00 $8,013,600.00
6. Expenses:
7. Variable:
8. 14,400 units × $104 per unit $1,497,600.00 $1,497,600.00
9. 21,600 units × $193* per unit $4,168,800.00 4,168,800.00
10. Fixed 200,000.00 520,000.00 720,000.00
11. Total expenses $1,697,600.00 $4,688,800.00 $6,386,400.00
12. Income from operations $376,000.00 $1,251,200.00 $1,627,200.00
*$150 of the $193 per unit represents materials costs, and the remaining $43 per unit represents other variable conversion expenses incurred within the Commercial Division. The Consumer Division is presently producing 14,400 units out of a total capacity of 17,280 units. Materials used in producing the Commercial Division’s product are currently purchased from outside suppliers at a price of $150 per unit. The Consumer Division is able to produce the materials used by the Commercial Division. Except for the possible transfer of materials between divisions, no changes are expected in sales and expenses. Required:1. Would the market price of $150 per unit be an appropriate transfer price for Garcon Inc.? Explain.2. If the Commercial Division purchases 2,880 units from the Consumer Division, rather than externally, at a negotiated transfer price of $115 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 Garcon Inc. based on the data in Requirement 2.4. If a transfer price of $126 per unit is negotiated, how much would the income from operations of each division and the total company income from operations increase?