Vancouver Valley Ltd. has two divisions, Computer Services and Management Advisory Services. In addition to its external customers, each division performs work for the other division. The external fees earned by each division in the past year were $200,000 for Computer Services and $350,000 for Management Advisory Services. Computer Services worked 3,000 hours for Management Advisory Services and Management Advisory Services in turn worked 1,200 hours for Computer Services. The total costs of external services performed were $110,000 by Computer Services, and $240,000 by Management Advisory Services.
Required:
a. Determine the operating income for each division and for the company as a whole if the transfer price from Computer Services to Management Advisory Services is $15 per hour and the transfer price from Management Advisory Services to Computer Services is $12.50 per hour.
b. Determine the operating income for each division and for the company as a whole if the transfer price from each to the other is $15 per hour.
c. What are the operating income results for each division and for the company as a whole if the two divisions net their hours worked for each other and charge $12.50 per hour for the one with the excess? Which division manager prefers this arrangement?
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