A company established a branch to sell automobile seat covers. The company purchases these covers and stores them in a warehouse. The covers are then shipped from the warehouse to both the home office and the new branch FOB destination. Home office management is responsible for setting the transfer price of the covers charged to the branch in a manner that will measure the long-run incremental cost of supplying the covers.
Per unit costs of the covers are:
$60.00 purchase price.
2.50 shipping cost to warehouse.
3.00 handling cost, including $1 allocated administrative overhead.
3.50 shipping cost to branch paid by home office.
The minimum transfer price that home office should charge the branch to meet its measurement objective is:
The minimum transfer price is the incremental cost which ...
The solution explains how to determine the minimum transfer price to be charged.