The Kelso Division produces and sells a product to external and internal customers. Per-unit information about its operations include: $\begin{array}{l}
\begin{array}{lr}
\text { Selling price per unit to external customers } & \$ 250 \
\text { Variable manufacturing costs per unit } & 115 \
\text { Fixed manufacturing overhead costs per unit } &70
\end{array}\

\end{array}$
If Kelso has sufficient excess capacity to meet internal demand, what should be the transfer price for Kelso's product?

Question

The Kelso Division produces and sells a product to external and internal customers. Per-unit information about its operations include: $\begin{array}{l}
\begin{array}{lr}
\text { Selling price per unit to external customers } & \$ 250 \
\text { Variable manufacturing costs per unit } & 115 \
\text { Fixed manufacturing overhead costs per unit } &70
\end{array}\

\end{array}$
  If Kelso has sufficient excess capacity to meet internal demand, what should be the transfer price for Kelso's product?

Quizplus · Accepted Answer

The transfer price should at least cover the variable costs when there is excess capacity, which is $115 per unit in this case. Fixed costs are not relevant for the transfer price decision in this scenario because they are incurred regardless of whether the product is sold internally or externally.

The Kelso Division Produces and Sells a Product to External