Question

1. Division A makes a part with variable cost of $100/# and sales price of $200/#.

Discuss the negotiated price to be transferred to division B.

Answer 1

The minimum transfer price will be the variable cost of production of Division A i.e., $ 100 per unit.

The maximum transfer price Division B will accept is the price with which it can buy the same item from an outside supplier less cost of adjustment (i.e., the additional price Division B will be spending to make the item ready for its use(if any).

So the negotiated price will be between :-

a) Variable cost = $ 100, and

b) Price to be paid by Division B to outside supplier - Cost of adjustment(if any)