In: Accounting
The Hampton Division of Long Island company sells all of its output to the Finishing Division of the company. The only product of the Hampton Division is chair legs that are used by the Finishing Division. The retail price of the legs is $20 per leg. Each chair completed by the Finishing Division required four legs. Production quantity and cost data for 2014 are as follows: | |||
Chair legs produced | 30,000 | ||
Direct materials | $5.50 | ||
Direct labor | $4.00 | ||
Factory overhead (25% variable) | $8.00 | ||
Assume that all variable costs are relevant costs and all fixed costs are unavoidable. |
PART1 MAXIMUM TRANSFER PRICE
MAXIMUM TRANSFER PRICE = $20, i.e, the maximum retail price of the product.
PART2 MINIMUM TRANSFER PRICE
IN CASE ALL THE OUTPUT CAN BE SOLD IN OUTSIDE MARKET THEN,
TRANSFER PRICE = MARGINAL COST + OPPORTUNITY COST GIVEN UP FROM OUTSIDE SALE
CALCULATION OF MARGINAL COST
PARTICULARS AMOUNT
DIRECT MATERIAL $5.5
DIRECT LABOUR $4.0
FACTORY OVERHEAD (VARIABLE) $2.0
TOTAL COST $11.5
CALCULATION OF OPPORTUNITY COST
SALES PRICE = $20
MARGINAL COST = $11.5
OPPORTUNITY COST= $8.5
MINIMUM TRANSFER PRICE = MARGINAL COST + OPPORTUNITY COST
= $11.5+$8.5
=$20
PARTC MINIMUM TRANSFER PRICE
IN CASE IF THERE IS MAXIMUM CAPACITY THEN,
TRANSFER PRICE = MARGINAL COST
CALCULATION OF MARGINAL COST
PARTICULARS AMOUNT
DIRECT MATERIAL $5.5
DIRECT LABOUR $4.0
FACTORY OVERHEAD (VARIABLE) $2.0
TOTAL COST $11.5
SO, MINIMUM TRANSFER PRICE = $11.5
PART4 CALCULATION OF TRANSFER PRICE
CALCULATION OF VARIABLE COST
PARTICULARS AMOUNT
DIRECT MATERIAL $5.5
DIRECT LABOUR $4.0
FACTORY OVERHEAD (VARIABLE) $2.0
TOTAL VARIABLE COST $11.5
ADD: FIXED FEES $2
TOTAL COST $13.5
TRANSFER PRICE IS $13.5
SINCE THERE IS NO DEMAND IN THE OUTSIDE MARKET AND THE PRODUCTION COST IS LESS THAN $20 SO BOTH THE DEPARTMENT WILL AGREE AT $13.5 PRICE
PART5
CALCULATION OF COST
PARTICULARS AMOUNT
DIRECT MATERIAL $5.5
DIRECT LABOUR $4.0
FACTORY OVERHEAD $8.0
TOTAL COST $17.5
ADD:17.5 X 20% $3.5
TOTAL COST $21
TRANSFER PRICE =$21
IN THE GIVEN CASE , SINCE IT IS COSTLY BY $1 FROM EXTERNAL MARKET PRICE SO IT IS NOT ADVISABLE TO TRANSFER