1. The Safeway division of Amco Products manufactures batteries that it sells primarily to the Alpha-Beta division for inclusion with that division's main product. In 19A, half of the batteries were sold to outside companies at a price of $2 each. The remaining batteries went to the Alpha-Beta division. Cost data for 19B for the Safeway division are given below.
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Production
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120,000 units
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Variable manufacturing costs
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$1 20,000
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Fixed overhead
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$60,000
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Selling expenses (all variable)
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$30,000
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Administrative expenses (all fixed)
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$20,000
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What should be the transfer price for the batteries if the company uses:
(a) Market price?
(b) Variable cost?
(c) A negotiated transfer price that will yield a markup of 20 percent on its product cost
(absorption cost) for Safeway?
2. Prepare a schedule of Safeway division's contribution margin for each of the transfer pricing alternatives computed in part 1.