Question

The Timberland Lumber Company had the following historical accounting data, per 100 board feet, concerning one of its products in the Sawmill Division:

Finished shelving:
Direct materials	$30
Direct labor	16
Variable manufacturing overhead	8
Fixed manufacturing overhead	12

The historical data is based on an average volume per period of 20,000 board feet. The shelving is normally transferred internally from the Sawmill Division to the Finishing Division. Timberland may also sell the shelving externally for $90 per 100 board feet. The divisions are taxed at identical rates.

Which of the following transfer pricing methods would lead to the highest Finishing Division income if 10,000 board feet are produced and transferred in entirety this period from Sawmill to Finishing?

		A. Market price
		B. All variable costs plus 50% markup.
		C. Full absorption costing plus 10% markup
		D. None of these methods generates a higher division income than another.

Answer 1

Finishing Division Income would be highest when the transfer price is lowest from Sawmill Division to Finishing Division
Transfer prices under various methods will be as follows:
A.Market Price	$90	per 100 board Feet
B.All Variable costs + 50%	81	per 100 board Feet
C.Full Absorption cost + 10%	72.6	per 100 board Feet
Hence, C. Full absorption costing plus 10% markup would generate highest income for finishing division