The Mukilteo Division of Snohomish Corp. produces and sells a product to outside and internal customers. Per-unit data collected from its operations include: $$\begin{array} { l r }
\text { Outside sales price } & \$ 640 \
\text { Direct materials } & 105 \
\text { Direct labour } & 250 \
\text { Fixed overhead } & 180
\end{array}$$ If Mukilteo has excess capacity available to meet an internal order, what transfer price should be set?

Question

The Mukilteo Division of Snohomish Corp. produces and sells a product to outside and internal customers. Per-unit data collected from its operations include: $$\begin{array} { l r } 
\text { Outside sales price } & \$ 640 \
\text { Direct materials } & 105 \
\text { Direct labour } & 250 \
\text { Fixed overhead } & 180
\end{array}$$ If Mukilteo has excess capacity available to meet an internal order, what transfer price should be set?

Quizplus · Accepted Answer

The transfer price should cover the variable costs, which are the direct materials ($105) and direct labor ($250), totaling $355. Fixed overhead is not considered in the transfer price when there is excess capacity, as it does not incrementally increase with the internal order.

The Mukilteo Division of Snohomish Corp If Mukilteo Has Excess Capacity Available to Meet an Internal