Question

Vision Company has two divisions, Pulp Division and Carton Division. Carton Division would like to buy 15,000 tons of pulp from Pulp Division. Currently, Pulp Division is operating at full capacity and is making 50,000 tons of pulp per month. Costs of pulp are as follows:

Variable costs	$44 per ton
Fixed costs	$20 per ton

The company uses a cost-based transfer pricing and its policy is to set a transfer price of pulp at a 16% markup to the pulp's full costs.

(Q): Based on the company's policy, what is the price per ton that the Pulp Division should charge the Carton Division?

(Do not round intermediate calculations. Round the final numbers to two decimal places.)  

(A): $  per ton

Answer 1

Calculation of Transfer price per ton that Pulp division should charge Carton Division:

Option 1: For Transfer Pricing, the company considers both variable and fixed costs for full costs

Cost for Pulp division = $ 44 + $ 20 = $ 64

Cost based Transfer price = Cost + 16% Markup =$64 x 116% = $ 74.24 per ton

Option 2 : For Transfer Pricing, the company consider only the Variable costs (Since the Fixed costs are anyway incurred)

Cost for Pulp division = $ 44

Cost based Transfer price = Cost + 16% Markup =$44 x 116% = $ 51.04 per ton