Question

need requirements 1-3

E10-24A (similar to) Question Help Garcia Motors manufactures specialty tractors. It has two divisions: a Tractor Division and a Tire Division. The Tractor Division can use the tires produced by the Tire Division. The market price per tire is $50. The Tire Division has the following costs per tire: (Click the icon to view the costs and additional information.) Read the requirements Requirement 1. Assume that the Tire Division has excess capacity, meaning that it can produce tires for the Tractor Division without giving up any of its current tire sales to outsiders. If Garcia Motors has a negotiated transfer price policy what is the lowest acceptable transfer price? What is the highest acceptable transfer price? (Assume the $4 includes only the variable portion of conversion costs.) the Tire Division's The lowest acceptable transfer price is Choose from any list or enter any number in the input fields and then click Check Answer Check Answer parts remaining Clear All 4 Requirements 1. Assume that the Tire Division has excess capacity, meaning that it can produce tires for the Tractor Division without giving up any of its current tire sales to outsiders. If Garcia Motors has a negotiated transfer price policy, what is the lowest acceptable transfer price? What is the highest acceptable transfer price? 2. If Garcia Motors has a cost-plus transfer price policy of full absorption cost plus 20%, what would the transfer price be? 3. If the Tire Division is currently producing at capacity (meaning that it is selling every single tire it has the capacity to produce), what would likely be the fairest transfer price strategy to use? What would be the transfer price in this case? Print Done se fh tional information.) ales to c on has e convers More Info ptable tr Direct material cost per tire $29 Conversion costs per tire $4 (Assume the $4 includes only the variable portion of conversion costs.) Fixed manufacturing overhead cost for the year is expected to total $90,000. The Tire Division expects to manufacture 45,000 tires this year. The fixed manufacturing overhead per tire is $2 ($90,000 divided by 45,000 tires). Done Print

Answer 1

Solution:

	Total $ (45,000 Tyres)	Per Tyre $
Sales	22,50,000.00	50.00
Direct Material	13,05,000.00	29.00
Conversion Costs	1,80,000.00	4.00
Total Variable Costs	14,85,000.00	33.00
Contribution = Sales - Total Variable Costs	7,65,000.00	17.00
Fixed Cost	90,000.00	2.00
Less: Profit	6,75,000.00	15.00

Solution 1) Assuming that Tyre Department has excess capacity, the lowest acceptable transfer price it should be the Total Variable Cost for manufacturing tyre i.e. $33 and the highest acceptable transfer price will be equal to the Market Price of the Type i.e $50

Solution 2) If Garcia Motors has a cost plus transfer pricing policy of full absorption cost plus 20%, the transfer price would be:

= Total Cost of Manufacturing a Tyre + 20%

= (Total Variable Cost + Total Fixed Cost) +20%

= ($33 + $2) + 20%

= $42

The transfer price as per cost plus transfer pricing policy of full absorption cost plus 20% is $42

Solution 3) If the Tyre Department is producing at capacity, then the fairest transfer price will be equal to the Market Price – Fixed Cost per Unit i.e. $50 - $2 = $48 as the Tyre Department is producing at its full capacity, its fixed overheads are already recovered from outside sales.