Question

The Wood Parts Division of Alpha Company sells all of its output to the Finishing Division of the company. The only product of the Wood Parts Division is chair legs that are used by the Finishing Division. The retail price of the legs is $20 per leg. Each chair completed by the Finishing Division requires four legs. Production quantity and cost data are as follows:

Number of chair legs produced each year 30,000

Direct materials $135,000

Direct labor $ 90,000

Manufacturing overhead (25% is variable) $ 90,000

Required: show your calculations Compute the transfer price for a chair leg using:

a. Market price

b. Variable product costs plus a fixed fee of 20%

Answer 1

A)

Transfer at market price: In this problem it is given that retail price of chair leg is $20, the market price transfer would thus be made at $20 per leg

B)

Material cost for 30,000 units - $135,000

Labour cost for 30,000 units - $90,000

Variable cost for 30,000 units - $22,500 (90,000*25%)

Total variable cost for 30,000 units - $247,500

Variable cost per unit - $8.25 ($247,500/30,000)

Fixed fee @20% - $1.65 ($8.25*20%)

Transfer price - $9.9 (8.25 + 1.65)