Question

Assume the Small Components Division of Martin Manufacturing produces a video card used in the assembly of a variety of electronic products.

The​ division's manufacturing costs and variable selling expenses related to the video card are as​ follows:

	Cost per unit
Direct materials	$9.00
Direct labor	$5.00
Variable manufacturing overhead	$8.00
Fixed manufacturing overhead
(at current production level)	$3.00
Variable selling expenses	$8.00

The Computer Division of Martin Manufacturing can use the video card produced by the Small Components Division and is interested in purchasing the video card​ in-house rather than buying it from an outside supplier. The Small Components Division has sufficient excess capacity with which to make the extra video cards. Because of​ competition, the market price for this video card is $ 30 regardless of whether the video card is produced by Martin Manufacturing or another company.

1. What is the highest acceptable transfer price for the​ divisions?

2. Assuming the transfer price is negotiated between the divisions of the​ company, what would be the lowest acceptable transfer​ price? Assume variable selling expenses pertain to outside sales only.

3. Which transfer price would the manager of the Small Components Division​ prefer? Which transfer price would the manager of the Computer Division​ prefer?

4. If the​ company's policy requires that all​ in-house transfers must be priced at full absorption cost plus 12% what transfer price would be​ used? Assume that the increased production level needed to fill the transfer would result in fixed manufacturing overhead decreasing by $ 1.00 per unit. ​(Round your answer to the nearest​ cent.)

5. If the​ company's policy requires that all​ in-house transfers must be priced at total manufacturing variable cost plus 22% what transfer price would be​ used? Assume that the company does not consider fixed manufacturing overhead in setting its internal transfer price in this scenario. ​(Round your answer to the nearest​ cent.)

6. Assume now that the company does incur the variable selling expenses on internal transfers. If the company policy is to set transfer prices at 105% of the sum of the full absorption cost and the variable selling​ expenses, what transfer price would be​ set? Assume that the fixed manufacturing overhead would drop by $ 1.00 per unit as a result of the increased production resulting from the internal transfers.​ (Round your answer to the nearest​ cent.)

Answer 1

1	highest acceptable transfer price is the Outside market purchase price, i.e. $30 per unit.
2	Lowest acceptable transfer price is variable cost per unit, $22/unit.
	Direct amrerial	9
	Direct labour	5
	Variable mfg o/h	8
	Total	22
3	Manager of small component division would prefer highest acceptable price, as it will lead to increase in his department's profit results.
	Manager of computer division would prefer lowest acceptable price, as it will lead to increase in his department's profit results.
4	Absorption costing
				Amount
	Cost of manufacturing
	Direct material		9
	Direct labour		5
	Variable mfg o/h		8
	Foxed manufacturing overhead		2	24
	Operating cost
	Variable selling o/h			8
	Total absorption cost			32
	Transfer price
	(total absorption cost*1.12)			35.84
			or	$ 36	per unit