Question

The Rubber Division of Morgan Company manufactures rubber moldings and sells them externally for $50. Its variable cost is $20 per unit, and its fixed cost per unit is $7. Morgan's president wants the Rubber Division to transfer 5,000 units to another company division at a price of $27. Assuming the Rubber Division has available capacity for 5,000 additional units, the economic rule would set transfer price as:

Answer 1

Answer =$20

Inter divisional Transfer price is set at the minimum relevant cost of producing the goods.

Fixed cost per unit is irrelevant for calculating transfer price because fixed cost remains the same even if 5000 items are not transferred.

Fixed cost given in the question $7 is allocated fixed cost. When production increase this fixed cost per unit decreases since total fixed cost is same at all level of production.

The transfer price stated in the question as $27 is including fixed cost per unit which is not the correct method of calculating transfer price.

As already indicated above that division has available capacity which means there is no loss of regular sales for relevant cost is only $20 and transfer price too is $20