Question

Plish Company manufactures only one type of washing machine and has two divisions, the Compressor Division, and the Fabrication Division. The Compressor Division manufactures compressors for the Fabrication Division, which completes the washing machine and sells it to retailers. The Compressor Division "sells" compressors to the Fabrication Division. The market price for the Fabrication Division to purchase a compressor is $60.00. (Ignore changes in inventory.) The fixed costs for the Compressor Division are assumed to be the same over the range of 8000-13,000 units. The fixed costs for the Fabrication Division are assumed to be $11.50 per unit at 13,000 units.

        Compressor's costs per compressor are:

               Direct materials                        $18

               Direct labor                          $17.00

               Variable overhead                $6.50

               Division fixed costs              $8.00

        Fabrication's costs per completed air conditioner are:

               Direct materials                $162.00

               Direct labor                          $66.00

               Variable overhead              $23.00

               Division fixed costs              $8.00

What is the transfer price per compressor from the Compressor Division to the Fabrication Division if the transfer price per compressor is 110% of full costs?

Question 4 options:

	$54.45
	$47.30
	$32.45
	$19.80

Answer 1

A company may set the transfer price at full cost (also known as absorption cost), which is the sum of variable and fixed costs per unit. In order to ensure that the selling division earns a profit, they can also add a markup

Hence full Cost of Compressor division =

Direct materials $18.00

               Direct labor $17.00

               Variable overhead                $6.50

               Division fixed costs              $8.00

Total Cost $49.5

Markup 10% $4.95

110% full Cost $54.45