Reference no: EM132620412

Billy Bear Ltd. has two divisions, R&M and Consulting 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 $620,000 for R&M and $750,000 for Consulting Services. R&M worked 4,000 hours for Consulting Services and R&M in turn worked 3,050 hours for R&M. The total costs of external services performed were $263,000 by R&M, and $426,000 by Consulting Services.

Required:

Problem 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 $19 per hour and the transfer price from Management Advisory Services to Computer Services is $14.50 per hour.

Problem 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 $17 per hour.

Problem 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 $14.50 per hour for the one with the excess? Which division manager prefers this arrangement?