Question

Burdeno Appliances has two divisions, Sales and Financing. Sales is responsible for selling Burdeno’s inventory and maintaining inventory for future sale. Financing Division takes loan applications, packages loans into pools, and sells them in the financial markets. It also services the loans. Both divisions meet the requirements for segment disclosures under accounting rules. Sales Division had $24 million in sales last year. Costs, other than those charged by Financing Division, totaled $22 million. Financing Division earned revenues of $4.1 million from servicing loans and incurred outside costs of $4.6 million. In addition, Financing charged Operations $900,000 for loan-related fees. Sales’ manager complained to corporate that Financing was charging 150

What are the reported segment operating profits for each division, ignoring income taxes and using the $900,000 transfer price for the loan-related fees?

Answer 1

The Sales Division of Burdeno Appliances has an operating profit of $1.1 million, while the Financing Division has an operating profit of $400,000.

Step-by-step explanation:

To calculate the reported segment operating profits for each division of Burdeno Appliances, we need to consider the revenues, costs, and transfer price related to the loan servicing between divisions.

For the Sales Division, we have:

• Sales revenues: $24 million
• Costs: $22 million
• Transfer price charges from Financing: $900,000

The operating profit for Sales Division is calculated as:

Sales revenues - Costs - Transfer price = $24 million - $22 million - $900,000 = $1.1 million

For the Financing Division, we have:

• Revenues from servicing: $4.1 million
• Outside costs: $4.6 million
• Transfer price to Sales (not subtracted, as it's an intra-company charge): $900,000

The operating profit for Financing Division is calculated as:

Revenues from servicing - Outside costs + Transfer price = $4.1 million - $4.6 million + $900,000 = $400,000

If both divisions are included, the total operating profit for Burdeno Appliances would be the sum of both divisions' profits, $1.1 million + $400,000 = $1.5 million.