Fruities Ltd has two divisions, Durian Division and Juice Division. Durian Division has an annual capacity of 10 000 units of durian juice concentrate. Juice Division's annual requirement of durian juice concentrate is 8000 units. The variable production cost of one unit of durian juice concentrate at Durian Division is $6, but the division incurs $1 additional shipping cost per unit when selling to external suppliers. The market price for the division's durian juice concentrate is $10 per unit, and currently, the external demand for Durian Division's durian juice concentrate is 5000 units. Using the transfer pricing formula, Durian Division should charge the Juice Division:
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| Capacity of Durion Division | 10,000 | Units | ||
| External Demand | 5,000 | |||
| Units remaining for internal transfer | 5,000 | |||
| Hence, price to be charged: | ||||
| First 5000 Units | Next 3000 Units | Total | ||
| Variable Cost | $ 6.00 | $ 6.00 | ||
| Add: Contribution Lost from External sale | $10-$6-$1 | $ - | $ 3.00 | |
| Transfer price | a | $ 6.00 | $ 9.00 | |
| Units to be transferred | b | 5,000 | 3,000 | 8,000 |
| Total Price to be paid | a*b | $ 30,000 | $ 27,000 | $ 57,000 |
| Per unit Transfer Price $57,000/8,000 units | $ 7.13 | |||
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