Question

Division A of Sandpiper Inc. makes a component that sells externally for $150. Each unit of...

Division A of Sandpiper Inc. makes a component that sells externally for $150. Each unit of the component has $30 of variable cost and $20 of allocated fixed costs. Division B needs this component to make the firm’s main product. What is the transfer price if Division A is operating at its full capacity?

A.

$50
B.

$30
C.

$20
D.

$150
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Answer #1

If Division A is operating at full capacity, it means it is able to sell its entire output in the outside market and it does not have any excess/spare capacity.

So, if Division A has to provide the component to Division B it will have to sacrifice its sale to external customers. Hence, it should charge a minimum transfer price of $150 i.e. the price at which it is selling to external customers. If a price lower than $150 is charged as transfer price, it will reduce the overall profit of the company.

Hence, option D i.e. $150 is the correct answer.

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