Overton Company uses cost-based transfer pricing. Its Food Processing Division has a standard variable cost of $8.50 per case and allocated fixed overhead of $2.25. The Processing Division, which has excess capacity, sells its output to external customers for $12.00 per case.
- If Overton uses full (or absorption) cost as its base, the transfer price charged to its Retail Division should be:

Question

Quizplus · Accepted Answer

The full (or absorption) cost is calculated by adding the standard variable cost of $8.50 per case to the allocated fixed overhead of $2.25, which equals $10.75. This is the cost-based transfer price using full cost as the base.

Overton Company Uses Cost-Based Transfer Pricing