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 full (or absorption) cost as its base, the transfer price charged to its Retail Division should be:

Question

Quizplus · Accepted Answer

Under cost-based transfer pricing, the transfer price charged to the Retail Division should cover the variable cost and allocated fixed overhead of the Processing Division. Therefore, the transfer price should be $8.50 + $2.25 = $10.75 per case. Using full (or absorption) cost does not affect the transfer price calculation as the fixed overhead is already allocated to the variable cost per case. Therefore, option C is the correct answer. Options A, B, and D are incorrect as they either include a markup or do not consider the fixed overhead allocated to the cost per case. Option E could be a valid choice, but it is not necessary in this case as a clear cost-based transfer pricing method is available.

Underwood Company Uses Cost-Based Transfer Pricing