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

Question

Quizplus · Accepted Answer

The transfer price should be set at the variable cost, which includes direct materials and direct labor, totaling $355. Fixed overhead is not included as it is a sunk cost and does not affect the decision when there is excess capacity.