Division X and Division Y are part of Company Z. Division X produces widgets that can...
Division X and Division Y are part of Company Z. Division X produces widgets that can be used by Division Y. The market price of the widget is $25. Variable product cost is $15. Fixed cost is $9. Full capacity is 200,000 units.
1. Assuming that Division X is operating at 80% capacity, what would be a feasible transfer price for Division X? Why?
2. Assuming that Division X is operating at 100% capacity, what would be a feasible transfer price for Division X? Why?
Homework Answers
Solution:
1. If division X is operating at 80% capacity, then division is having a spare capacity to meet demand of Division Y, therefore feasible transfer price = Variable cost per unit = $15
This is feasible because division X can transfer at variable cost without incurring any loss.
2. If division X is operating at 100% capacity, transfer below regular price will result in decrease in income of Division X, therefore feasible transfer price = Regular selling price per unit = $25
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