General Transfer-Pricing Rule (LO 6)
Illinois Metallurgy Corporation has two divisions. The Fabrication Division transfers partially completed components to the Assembly Division at a predetermined transfer price. The Fabrication Division’s standard variable production cost per unit is $300. The division has no excess capacity, and it could sell all of its components to outside buyers at $380 per unit in a perfectly competitive market.
Required:
1. Determine a transfer price using the general rule.
2. How would the transfer price change if the Fabrication Division had excess capacity?
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