Question

Qs 22-17B Determining transfer prices without excess capacity LO C2 The Windshleld divislon of Fast Car Co. makes windshlelds for use In Fast Car's Assembly division. The Windshleld division Incurs varlable costs of $264 per windshleld and has capacity to make 530,000 windshlelds per year. The market price is $520 per windshleld. The Windshield divislon Incurs total fixed costs of $3,350.000 per year Assume the Windshleld divislon Is operating at full capacity, what transfer price should be used on transfers between the WIndshleld and Assembly divslons?

Answer 1

Answer---Transfer price per windshield= $520

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Explanation and calculations

Relevant cost of manufacturing(variable cost)	$ 264.00
Add: Loss on contribution on regular sales (520-264)	$ 256.00
Minimum transfer price	$ 520.00

Transfer price is set at minimum of cost that is relevant for manufacturing a unit.

In this case variable cost of manufacturing windshield is $264 which should be the transfer price if company has enough capacity to produce units for assembly division, but this is not the case. Windshield division does not have any capacity left and if it transfers windshield to assembly division then windshield division will have to loose regular sales. If company has to maintain same revenue level then minimum transfer could be regular sales price and that is $520