Starline Inc.manufactures and sells commercial coffee makers and coffee grinders.The Coffee Grinder Division incurs the following costs for the production of each coffee grinder when 4,000 coffee grinders are produced each year.
$\begin{array}{lr}
\text { Direct materials } & \$ 12.00 \
\text { Direct labor } & 10,50 \
\text { Variable overhead } & 7.50 \
\text { Fixed overhead } & 6.00 \
\text { Total cost } & \$ \underline{36.00} \
\end{array}$
The company sells the coffee grinders to various retail stores for $60.00.The Coffee Maker Division is doing a promotion whereby each customer that purchases a coffee maker will receive a free coffee grinder.The Coffee Maker Division would like to purchase these coffee grinders from the Coffee Grinder Division.
Assuming the Coffee Grinder Division has excess capacity and there would be no lost sales by selling internally,what is the optimal transfer price that should be charged to the Coffee Maker Division?

Question

Quizplus · Accepted Answer

The optimal transfer price should cover the variable costs (direct materials, direct labor, and variable overhead) which total $30.00 ($12.00 + $10.50 + $7.50). Fixed costs are not considered in the transfer price when there is excess capacity, as they would be incurred regardless of the internal transfer.

Starline Inc The Company Sells the Coffee Grinders to Various Retail Stores