What if the fabrication division had excess capacity how

Question

General Transfer-Pricing Rule Glendale Manufacturing is organized into two divisions: Fabrica- tion and Assembly. Components transferred between the two divisions are recorded at a predeter- mined transfer price. Standard variable manufacturing cost per unit in the Fabrication Division is $500. At the present time, this division is working to capacity. Fabrication estimates that the units it produces could be sold on the external market for $650. The product under consideration is viewed as a commodity-type product, with no differentiating features or characteristics.

Required

1. What roles are played by transfer prices? That is, why are transfer prices needed?

2. Use the general transfer-pricing rule presented in the chapter to determine an appropriate transfer price. Why (or in what sense) is the amount you calculated considered an appropriate transfer price?

3. What if the Fabrication Division had excess capacity? How would this change the indicated transfer price? Why is the amount you determined considered an appropriate transfer price?

4. Are there any downsides of using the general transfer-pricing rule to determine the transfer price for internal transfers?

Answer 1

Solve the following numerical problem and respond to the following parts of the question. Glendale Manufacturing is systematized into two divisions: Fabrication and Assembly. The components transferred between the two divisions are recorded at a predetermined transfer price. The standard variable manufacturing cost per unit in the Fabrication Division is $500. At present time, this division is working to ability. Fabrication predicts that the units it makes could be sold on the external market for $650. The product in consideration is out looked as a commodity-type product, having no differentiating characteristics or features. 1) Illustrate what roles are played via transfer prices? That is, explain why are transfer prices required? 2) Make use of the general transfer-pricing rule represented in the chapter to find out an appropriate transfer price. Explain why is the amount you computed considered a suitable transfer price?