Question

Graham 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 $60.

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 $114,000. The Tire Division expects to manufacture 57,000

tires this year. The fixed manufacturing overhead per tire is $2 ($114,000 divided by 57,000 ​tires).

The Tire Division has the following costs per​ tire:

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 Graham Motors has a negotiated transfer price​ policy, what is the lowest acceptable transfer​price? What is the highest acceptable transfer​ price?
2.	If Graham 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?

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 Graham 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 lowest acceptable transfer price is S the Tire Division's the Tire Division's The highest acceptable transfer price is $ Requirement 2. If Graham Motors has a cost-plus transfer price policy of full absorption cost plus 20%, what would the transfer price be? (Assume the $4 includes only the variable portion of conversion costs.) Begin by selecting the formula to compute the transfer price under this strategy. Cost-plus transfer price - Graham Motors has a cost-plus transfer price po licy of full absorption cost plus 20%, the transfer price would be $ Requirement 3. If the strategy to use? What would be the transfer price in this case? e 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 When a company is producing and selling at its capacity, the fairest transfer price strategy to use is the strategy. In this case, the transfer price would be $

Answer 1

Ans 1
If there is excess capacity that the relevant cost is the variable cost
Direct Material	$29
Conversion cost	$4
Lowest acceptable transfer price	$33	the Tire division variable cost per tire
Highest transfer price is the market price is $60 tire division market price
ans 2
Formula=(Variable cost per tire+fixed manufacturing overhead)*(1+markup)
Cost plus transfer price
Direct Material	$29
Conversion cost	$4
Fixed manufacturing overhead	$2
Full cost	$35
20% markup	$7
Transfer price	$42
ans 3
Here formula is variable cost per tire+contribution margin foregone per tire
If there is no excess capacity that transfer price
Relevant cost plus contribution margin
33+(60-33)	60
Transfer price would be $60
If any doubt please comment