Question

A number of Under Armour's products utilise soft knit fabric with mesh ventilation. The following presents hypothetical information concerning the use of this fabric. This fabric is prepared by the Fabric Department, before it is transferred to the Stitching Department. The Fabric Department can sell the finished fabric to external customers. The market price is $20.00 per square metre. The following table summarises the cost to the Fabric Department to produce each square metre of fabric.

	Fabric (per square metre)
Direct Materials	$8.00
Direct Labour	$2.00
Variable Overhead	$2.00
Fixed Overhead	$1.00

  

Required:

1. Assuming the transfer price for fabric sales between the Fabric and Stitching Departments was established through negotiation between managers, identify the likely range of possible transfer prices and what the contribution margin of each department would be if the highest price was used. Is this method of establishing a transfer price appropriate? What other techniques are available? Overall, which is the most appropriate for this situation and why?
2. Calculate the transfer price for Fabric sales between the Fabric and the Stitching Departments if cost-plus pricing, based on absorption cost with a 20% markup, is used.
3. Calculate the transfer price for Fabric sales between the Fabric and the Stitching Departments if cost-plus pricing, based on variable cost with a 30% markup, is used.
4. Calculate the transfer price for Fabric sales between the Fabric and the Stitching Departments if the general transfer price rule is used and the Fabric Department has no spare capacity.
5. Calculate the transfer price for Fabric sales between the Fabric and the Stitching Departments if the general transfer price rule is used and the Fabric Department has spare capacity.

The answers for the above need to be discussed and supported by relevant calculations/workings.

Answer 1