Reference no: EM133019106
Question - Division A and Division B are both independent divisions. Division A normally purchased 20,000 kg materials from the outside market at a price of $150/kg. Division B usually could make 60,000 kg of similar material to external market at a price of $200/kg. The fixed costs of Division B are $2,880,000 and the variable costs of the production is $90/kg. Division B used a full cost method to calculate the product cost and set transferring price.
Now, Division A could purchase the 20,000kg material from Division B, which made the Division B to increase the production from 60,000 kg to 80,000kg. (the fixed cost is based on the current 80,000 kg capacity, and the full cost could be calculated based on total fixed cost divided by the current output level)
a. Using the full cost transfer price to determine whether it is in the best interests of each division. Show calculations.
b. What would the transfer price if based on general transfer pricing rule?
c. If the Division A plans to increase an extra 15,000kg per month (in addition to the 20,000) but Division B does not have spare capacity for the extra 15,000. What is the best transfer price in this case?
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