Question

Buzz’s Florida Division is currently purchasing a part from an outside supplier. The company's Georgia Division, which has excess capacity, makes and sells this part for external customers at a variable cost of $22 and a selling price of $34. If Georgia begins sales to Florida, it (1) will use the general transfer-pricing rule and (2) will be able to reduce variable cost on internal transfers by $4. If sales to outsiders will not be affected, Georgia would establish a transfer price of:

Answer 1

Answer:

Georgia will establish a transfer price of $18, that is, $22 - $4 = $18.

Explanation:

Since the company has excess capacity, the transfer price should be variable cost. Georgia has a plan to reduce variable cost on internal transfers by $4. Thus, the appropriate transfer price is $22 - $4 = $18.