[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 $470. The division has no excess capacity, and it could sell all of its components to outside buyers at $610 per unit in a perfectly competitive market. Exercise 13-34 Part 1 Required: 1. Determine a transfer price using the general rule. Transfer price

Explanation / Answer

1) Transfer Price using the general rule:

As per the general rule the supplying department should cover atleast the variable cost of production and the opportunity cost i.e. benefit which is foregone due to loss of sale to outside customers

Hence in this case, transfer price should be $ 610 per unit as it covers the variable cost per unit and the profit of the division which gets lost due to loss of outside sales.

2) Transfer Price if the fabricated division had excess capacity:

The excess capacity can now be sold to outside customers at the price of $ 610 per unit and the division can earn the profit on those units therfore only the variable cost of production is relevant

Hence, the transfer price in this case would be $ 470 per unit.   

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