Sorenson Products has two divisions: a kitchen wares division that manufactures ceramic dishes and a ceramic resin division that manufactures the resin used in creating ceramic products. All ceramic used by the kitchen wares division is supplied by the ceramic resin division, which also supplies resin to outside companies. What is the best transfer price for the resin, assuming that the resin division is operating at only 70 percent of capacity?

Question

Quizplus · Accepted Answer

The best transfer price in this scenario would be the incremental cost of the resin, which includes only the actual additional cost incurred by the resin division to produce the resin. This price is fair to both divisions because it ensures that the kitchen wares division is not overpaying for the resin, while also allowing the resin division to cover its variable costs and make a profit on the incremental production. The market price or full cost of the resin may not be an accurate reflection of the actual cost to the resin division and could lead to one division being unfairly disadvantaged. Using the contribution margin would also overstate the actual cost of the resin since it includes fixed costs that are not relevant to the incremental cost of producing more resin.

Sorenson Products Has Two Divisions: a Kitchen Wares Division That