Assume that Selling Division and Buying Division are both owned by Overall Corpo

Question

Assume that Selling Division and Buying Division are both owned by Overall Corporation. Selling Division sells a product that is used by Buying Division and outside customers. Selling Division has 28,000 units of excess capacity. Selling Division currently sells the product for $25 per unit and Buying Division currently buys 28,000 units of the product from an outside source for $25 per unit. Variable costs of the product are $5, of which $1.25 is the cost of selling the product to an outside customer.

Using Selling price less avoidable costs as the minimum price, fill in the following formula for the desired transfer price: $________ < transfer price < $________ .

Using Variable costs as the minimum price, fill in the following formula for the desired transfer price: $_______ < transfer price < $___________ .

Explanation / Answer

1 Selling Price Less Avoidable cost Aviodable cost for transfer pricing is selling cost to outside customer=$1.25 per unit Selling Price=$25 per unit. So transfer price by Sales price Less Avoidable cost =    =$25-$1.25 =$23.75 per unit 2 Variable cost per units =$5 Using Variable cost as Transfer Price . Transfer Price=Variable Cost =$5 per unit

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