Question

Transfer pricing

Marklee Industries makes electric motors for a variety of small appliances. It sells the
motors to manufacturers that assemble and sell the appliances. The company’s market
research department has discovered a market for electric motors used for trolling in small
fishing boats, which Marklee presently does not produce. The market research department has indicated that motors likely would sell for $46 each. A similar motor currently being produced has the following manufacturing
costs:

Direct materials $24
Direct labor 10
Overhead 8
Total $42

Assume that Marklee desires an operating profit margin of 10 percent.

a. Suppose that Marklee uses cost-plus pricing, setting the price 10 percent above
the manufacturing cost. What price should it charge for the motor?
b. Suppose that Marklee uses target costing. What price should it charge for a
trolling motor? What is the highest acceptable manufacturing cost for which
Marklee would be willing to produce the motor?
c. Would you produce such a motor if you were a manager at Marklee? Explain.

Answer 1