The Eastern Division sells goods internally to the Western Division at Tennessee Company. The quoted external price in industry publications from a supplier near Eastern is $200 per ton plus transportation. It costs $20 per ton to transport the goods to Western. Eastern's actual market cost per ton to buy the direct materials to make the transferred product is $100 and actual per-ton direct labor is $50. Other actual costs of storage and handling are $40. Tennessee Company's president selects a $220 transfer price. This is an example of: (CIA adapted)
A) market-based transfer pricing.
B) cost-based transfer pricing.
C) negotiated transfer pricing.
D) cost plus 20% transfer pricing.

Question

Quizplus · Accepted Answer

The transfer price of $220 is based on the external market price of $200 plus transportation costs of $20, making it an example of market-based transfer pricing.

The Eastern Division Sells Goods Internally to the Western Division