The Assembly Division of Mounds Corporation makes a component part that the Pack
ID: 2497187 • Letter: T
Question
The Assembly Division of Mounds Corporation makes a component part that the Packaging Division needs to purchase. The Assembly Division’s variable cost of manufacturing the component is $25 per unit. The component is also available on the open market at a price of $52. The Packaging Division needs 800 units of the component and the Assembly Division has excess capacity of 1,000 units.
Required: Calculate the cost-based-transfer price that the Assembly division should charge the Packaging division. Calculate the market-based transfer price that the Assembly division should charge the Packaging division.
Explanation / Answer
Transfer Price based on Cost-
As Assembly division has unused capacity of 1000 units and need of Packaging division is only 800 units.
Variable cost of manufacturing = $ 25 per unit.
Hence Transfer Price based on Cost = $ 25 x 800 units
Transfer Price = $20,000
Cost based transfer price are appropriate when market price is not available or it is inappropriate.
Transfer Price Based on Market Price-
Market based transfer price is used when there is perfectly competitive market for the intermediate products being transferred.
Transfer Price based on Market Price = $52 x 800 units
Transfer Price = $41,600
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