The Machining Division has a capacity of 2,000 units. Its sales and cost data are: Selling price per unit $100
Variable manufacturing costs per unit $25
Variable administrative costs per unit $5
Total fixed manufacturing overhead $20,000
Total fixed administrative costs $5,000
The Machining Division is currently selling 1,900 units to outside customers, and the Assembly Division wants to purchase 300 units from Machining. If the transaction takes place, the variable administrative costs per unit on the units transferred to Assembly will be $2/unit, not $5/unit. What should be the transfer price?

Question

Quizplus · Accepted Answer

The transfer price should be equal to the variable manufacturing costs plus the variable administrative costs that would be incurred if the units were sold to an outside customer. In this case, the variable manufacturing costs are $25 per unit and the variable administrative costs are $2 per unit, so the transfer price should be $27 per unit.

The Machining Division Has a Capacity of 2,000 Units