Question

The Sunrise Mattress Company uses transfer pricing for all work in process transfers between its divisions. Senior management believes that the transfer price is an important tool to motivate appropriate behaviour and believes that each division should negotiate its prices when a transfer takes place. To make the mattresses that the company sells, the Spring Division buys processed cloth padding from an outside supplier.

Cost information on the foam produced in the Foam Division is as follows:

       Raw material costs                                        $10 per tonne

       Variable manufacturing costs                         $17 per tonne

       Fixed manufacturing costs                             $15 per tonne

       Variable selling costs                                     $4 per tonne

       Outside selling price                                     $40 per tonne

       Annual production capacity                           100,000 tonnes

The Foam Division currently produces and sells at its capacity.

Answer 1