Fixing transfer pricing with and without idle capacity.
The FRAMES "N MORE corporation has three divisions: Frames division, Glass division, and Pictures division. Frames division produces frames that are needed by Pictures division to manufacture the final product. The corporation has a negotiated transfer pricing policy.
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Frames division's unit costs and prices are as follows:
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Selling price to outside customers
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$12.00
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Variable cost of production
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$7.00
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Fixed cost of production
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$4.00
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Market price of frames
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$10.00
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A. What is Frames Division's contribution margin for this product?
B. What amount would be considered the maximum price (ceiling) in this example and what price would be the maximum price (floor)?
C. If Frames has idle capacity, what is the probable transfer price? EXPLAIN.
D. If Frames is currently operating at full capacity, what is the probable transfer price? EXPLAIN.