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Tranfer price under different situations

SportCo, Inc. is a multidivisional company that produces and sells athletic equipment. Division 1 produces components for a variety of products, while Division 2 assembles the components and packages the finished product. Both divisions are free to buy and sell internally or externally. For a particular soccer ball, the cost structure within Division 1 and market price are as follows:

Variable cost $4
Fixed cost 2
Market price 10

a. Assuming Division 1 is not operating at capacity, calculate the minimum acceptable transfer price.
b. Assuming Division 1 is operating at capacity, calculate the transfer price.
c. Explain why capacity is a factor in the transfer pricing decision.

Solution Preview

a. If the division 1 is not operating at at capacity, then it means that it has excess capacity. In such a situation, it should consider selling at the variable cost, since division 2 has an option of buying from elsewhere. The minimum acceptable ...

Solution Summary

The solution explains how to set the transfer price under different situations