Question

Buzz’s Florida Division is currently purchasing a part from an outside supplier. The company's Georgia Division, which has excess capacity, makes and sells this part for external customers at a variable cost of $18 and a selling price of $30. If Georgia begins sales to Florida, it (1) will use the general transfer-pricing rule and (2) will be able to reduce variable cost on internal transfers by $4. If sales to outsiders will not be affected, Georgia would establish a transfer price of:

Multiple Choice

• $14.

• $18.

• $26.

• $30.

• None of the answers is correct.

Darrin’s Auto Northern Division is currently purchasing a part from an outside supplier. The company's Southern Division, which has no excess capacity, makes and sells this part for external customers at a variable cost of $22 and a selling price of $34. If Southern begins sales to Northern, it (1) will use the general transfer-pricing rule and (2) will be able to reduce variable cost on internal transfers by $3. On the basis of this information, Southern would establish a transfer price of:

Multiple Choice

• $19.

• $22.

• $31.

• $34.

• None of the answers is correct.

Answer 1

1)	Since Georgia Division has excess capacity the transfer price would be
	the variable cost to Georgia Division.
	Variable costs on internal transfer = $18-$4 =$14
	Therefore transfer price = $14'
	Correct Option: FIRST
2)	Since Southern Division does not have excess capacity there is an opportunity cost
	if transfer internally and transfer price would be opportunity cost plus variable cost
	Opportunity costs = $34- 22 =$12
	Variable Costs = $22-$3 =$19
	Transfer price would be
	=$12+19
	=$31
	Correct Option: THIRD