[The following information applies to the questions displayed below.] Illinois M

Question

[The following information applies to the questions displayed below.]

Illinois Metallurgy Corporation has two divisions. The Fabrication Division transfers partially completed components to the Assembly Division at a predetermined transfer price. The Fabrication Division’s standard variable production cost per unit is $500. The division has no excess capacity, and it could sell all of its components to outside buyers at $670 per unit in a perfectly competitive market.

Determine a transfer price using the general rule.

What would be the transfer price if the Fabrication Division had excess capacity?

Explanation / Answer

1. Transfer price = Cost Outlay – Opportunity Cost = $500 + ($670 - $500) = $670

2. Transfer price = Cost Outlay – Opportunity Cost = $500 + $0 = $500

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