Question

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15. Colorado Furniture had the following historical accounting data, per hundred board feet, concerning one of its products:

 Finished shelving: Direct materials \$30 Direct labor 16 Variable overhead 10 Fixed overhead 12 Variable selling expenses 8 Fixed selling expenses 4

The shelving is normally transferred internally from the Cutting Division to the Finishing Division. It also may be sold externally for \$110 per hundred board feet. The minimum profit level accepted by the company is a markup of 20 percent. The variable selling expenses are avoidable if the shelving is sold internally.

If the negotiated price is used, Colorado Furniture's transfer price should be a

a. What is the maximum transfer price? (Ans: \$110, market price)

b. What is the minimum transfer price? (Ans: \$56, incremental cost)

c. If the transfer price policy is variable cost plus a 20% fee based on the cost, what is the transfer price? (Ans: \$67.2)

d. If the transfer price policy is full cost plus a 20%, markup, what is the transfer price? (Ans: \$96)

e. Suppose Cutting lacks enough capacity to serve both the external and internal market. What is the transfer price?

a) The maximum transfer price can not be above the price at which shelving is sold externally (i.e market price of shelving which is \$110 per hundred board feet). Therefore the maximum transfer price is \$110.

b) The minimum transfer price should be equal to total variable cost of making a sinlge hundred board feet. Total variable cost is calculated as follows:-

Total Variable Cost = Direct Materials+Direct Labor+Variable Overhead

= \$30+\$16+\$10 = \$56 per hundred board feet

Thus the minimum transfer price is \$56.

c) Desired Transfer Price = Total Variable cost+20% of Total Variable Cost

= \$56+(20% of \$56)

= \$56+\$11.20 = \$67.20

d) Total Cost = Direct Materials+Direct Labor+Variable OH+Fixed OH+Variable Selling Exp.+Fixed Selling Exp.

= \$30+\$16+\$10+\$12+\$8+\$4 = \$80

Desired Transfer Price = Total Cost+20% of total cost

= \$80+(20% of \$80)

= \$80+\$16 = \$96

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