Question

In: Accounting

The Hampton Division of Long Island company sells all of its output to the Finishing Division...

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.
  1. What is the maximum transfer price?
  2. What is the minimum transfer price if the Hampton Division can sell all of its output on the market?
  3. What is the minimum transfer price if the Hampton Division can only sell 10,000 chair legs on the external market and the Hampton Division has the capacity to produce 50,000 chair legs?
  4. What is the transfer price using variable product costs plus a fixed fee of $2 per chair leg? Do you suppose that Hampton and Finishing Divisions would choose to transfer at that price if Hampton cannot sell any of its output on the external market? Explain.
  5. What is the transfer price using full costs plus 20 percent? Do you suppose that Hampton and Finishing Divisions would choose to transfer at that price if Hampton cannot sell any of its output on the external market? Explain.

Solutions

Expert Solution

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


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