Question

The Windshield division of Fast Car Co. makes windshields for use in Fast Car’s Assembly division. The Windshield division incurs variable costs of $220 per windshield and has capacity to make 740,000 windshields per year. The market price is $515 per windshield. The Windshield division incurs total fixed costs of $3,950,000 per year. If the Windshield division is operating at full capacity, what transfer price should be used on transfers between the Windshield and Assembly divisions?

Answer 1

Transfer price is an alternative term of opportunity cost.

$ 289.66 is the transfer price can be utilized  for transport costs, loading and unloading costs, and administrative costs

solution

Transfer cost is the Total opportunity cost of moving an item from one place to another, including transport costs, loading and unloading costs, and administrative costs. Transfer price is an alternative term of opportunity cost.

Total variable cost  = 740,000× $220 = 162,800,000

Total fixed cost = $3,950,000

Total selling cost  = 740,000 × $515 = $381,100,000

Transfer cost = (selling cost - (variable cost + Fixed cost )

= ($381,100,000-  ($162,800,000 + $3,950,000)  = $214,350,000

$( 381,100,000- ( 162,800,000 + 3,950,000) = 214,350,000$

Transfer price = $214,350,000 ÷ 740,000 units = $ 289.66

$Transfer price = 214,350,000 ÷ 740,000 units = 289.66$