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?

Answer 1

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