Question

Scottsdale Manufacturing is organized into two divisions: Fabrication and Assembly. Components transferred between the two divisions are recorded at a predetermined transfer price. Standard variable manufacturing cost per unit in the Fabrication Division is $350. At the present time, this division is working to capacity. Fabrication estimates that the units it produces could be sold on the external market for $580. The product under consideration is viewed as a commodity-type product, with no differentiating features or characteristics Required: 2. Based on the general transfer pricing rule presented in Chapter 19, what is the minimum transfer price between units when the Fabrication Division is working to capacity? Transfer price 3. What if the Fabrication Division had excess capacity? How would this change the minimum transfer price as determined by the application of the general transfer pricing rule? Transfer price

Answer 1

Answer 2.
The general rule of transer pricing is that if the firm has an idle capacity, the transfer will be variable cost per unit, inflated by the opportunity cost of the unit, which is, the profit that unit generates if the product is sold outside in the market.
The firm does not have excess capacity.
Transfer Price = $580 per Unit (Market price per unit)
Answer 3.
The firm does have excess capacity.
Transfer Price = $350 per Unit (Standard Variable Manufacturing cost per unit)