Question

Scottsdale Manufacturing is organized into two divisions: Fabrication and Assembly. Components transferred between the two divisions are recorded at a predetermined transfer price. Standard variable manufacturing cost per unit in the Fabrication Division is $360. At the present time, this division is working to capacity. Fabrication estimates that the units it produces could be sold on the external market for $600. The product under consideration is viewed as a commodity-type product, with no differentiating features or characteristics.
Required:
1. Based on the general transfer pricing rule presented in the chapter, what is the minimum transfer price between units when the Fabrication Division is working to capacity?
2. What if the Fabrication Division had excess capacity? How would this change the minimum transfer price as determined by the application of the general transfer pricing rule?

Answer 1

Answer:

1. The firm does not have excess capacity.

Minimum transfer price on full capacity = Variable Cost + Contribution to be Lost

Minimum transfer price on full capacity = $360 + ($600 - $360)

Minimum transfer price on full capacity = $360 + $240

Minimum transfer price on full capacity = $600

Transfer Price = $600 per Unit (Market price per unit).

2. The firm does have excess capacity. Minimum transfer price on excess capacity = $360 per Unit (Standard Variable Manufacturing cost per unit).