The Timberland Lumber Company had the following historical accounting data, per 100 board feet, concerning one of its products in the Sawmill Division:
The historical data is based on an average volume per period of 20,000 board feet. The shelving is normally transferred internally from the Sawmill Division to the Finishing Division. Timberland may also sell the shelving externally for $90 per 100 board feet. The divisions are taxed at identical rates.
Which of the following transfer pricing methods would lead to the highest Finishing Division income if 10,000 board feet are produced and transferred in entirety this period from Sawmill to Finishing?
A) Market price
B) All variable costs plus 50 percent markup
C) Full absorption costing plus 10 percent markup
D) None of these methods generates a higher division income than another.

Question

The Timberland Lumber Company had the following historical accounting data, per 100 board feet, concerning one of its products in the Sawmill Division:
 The historical data is based on an average volume per period of 20,000 board feet. The shelving is normally transferred internally from the Sawmill Division to the Finishing Division. Timberland may also sell the shelving externally for $90 per 100 board feet. The divisions are taxed at identical rates.
Which of the following transfer pricing methods would lead to the highest Finishing Division income if 10,000 board feet are produced and transferred in entirety this period from Sawmill to Finishing?
A) Market price 
B) All variable costs plus 50 percent markup 
C) Full absorption costing plus 10 percent markup 
D) None of these methods generates a higher division income than another.

Quizplus · Accepted Answer

The lowest transfer price leads to the greatest Finishing Division income. If only 10,000 feet are produced, the fixed manufacturing overhead per unit is $24, and full unit costs are $78. The transfer price under full absorption costing plus 10% is $85.80 per 100 feet, which is greater than the $81 per 100 feet under variable with 50% markup.

The Timberland Lumber Company Had the Following Historical Accounting Data