The Fabricating division makes a component part that the Assembly division needs for a new product....
The Fabricating division makes a component part that the
Assembly division needs for a new product. The Fabricating
division’s variable cost of manufacturing the component is $28 per
unit. The component is also available on the open market at a price
of $50 per unit. The Assembly division needs 936 units per year,
and the Fabricating division has excess capacity of 1,200
units.
(a) Calculate the cost-based transfer price that
the Fabricating division should charge the Assembly
division.
| Cost based transfer price |
(b) Calculate the market-based transfer price that
the Fabricating division should charge the Assembly
division.
| Market based transfer price |
Homework Answers
Since the Fabricating division has an excess capacity which is enough to satisfy the demand of Assembly division hence the opportunity cost will not be considered.
(a)So the Cost-based Transfer price shall be the Variable cost per unit incurred by Fabricating Division to manufacture the product. So the Cost based transfer price is $28 per unit.
(b)If market-based transfer price then the transfer price shall be the current market price of component which is $50 per unit.
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