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Transfer pricing

1. Maxum Ltd has capacity to produce 75,000 units of their product, which is currently produced in Division D. They currently produce and sell 61,000 units annually. Maxum only produces to order, so there are no inventories to report or account for. Each unit can be sold externally for $215 per unit, or may be transferred to another division where it would be used in the production of another product. That division (Division R) can purchase this unit from an external supplier for $195 per unit.

Additional information:
Division D Division R
Selling Price $215 $500
Variable costs 125 250
Fixed costs 65 130

Note: The variable costs for Division R do not include the cost of the product from Division D

Assuming that Division R currently purchases this unit from an external supplier, and that they require 15,000 units of the product to meet their demand what is the minimum price that could be charged to Division R?

a. $125
b. $127
c. $131
d. $195
e. $215

Solution Preview

Total requirement is 15,000 units. Division D has unused capacity of 75,000-61,000=14,000. The transfer price should be

1. For usused capacity of ...

Solution Summary

The solution explains how to determine the minimum transfer price