Branded Shoe Company manufactures only one type of shoe and has two divisions, t

Question

Branded Shoe Company manufactures only one type of shoe and has two divisions, the Stitching Division and the Polishing Division. The Stitching Division manufactures shoes for the Polishing Division, which completes the shoe and sells it to retailers. The Stitching Division "sells"shoes to the Polishing Division. The market price for the Polishing Division to purchase a pair of shoes is $42. (Ignore changes in inventory.) The fixed costs for the Stitching Division are assumed to be the same over the range of 40,000-100,000 units. The fixed costs for the Polishing Division are assumed to be $14 per pair at 100,000 units. Stitching's costs per pair of soles are: Direct materials $10 Direct labor $ 8 Variable overhead $ 6 Division fixed costs $ 4 Polishing's costs per completed pair of shoes are: Direct materials $14 Direct labor $ 6 Variable overhead $ 4 Division fixed costs $16 What is the market-based transfer price per pair of shoes from the Stitching Division to the Polishing Division? Select one: a. $20 b. $32 c. $42 d. $52

Explanation / Answer

Answer: c: $42

In market based transfer pricing, in the presence of competitive and stable external markets for the transferred product, many firms use the external market price as the transfer price. The upstream division (here the stitching division) is generally indifferent between receiving the market price from an external customer and receiving the same price from an internal customer.

In this case, the market price of the shoes for the polishing division is $42 per pair. Therfore, the market based transfer price per shpoes from the Stitching division will be $42 per pair.

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