Underwood 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 Underwood uses variable costs as its base, the transfer price charged to its Retail Division should be:

Question

Quizplus · Accepted Answer

Since Underwood Company uses cost-based transfer pricing and the Food Processing Division has excess capacity, the variable cost of $8.50 per case should serve as the minimum transfer price. Therefore, the transfer price charged to the Retail Division should be $8.50 plus any mark-up negotiated between the managers of the Processing and Retail Divisions. Choice D reflects this logic and is the best answer.

Underwood Company Uses Cost-Based Transfer Pricing