Problem
Delta Footwear Ltd. manufactures only one type of sandal and has two divisions, the Sole Division and the Assembly Division. The Sole Division manufactures soles for the Assembly Division, which completes the sandal and sells it to retailers. The Sole Division "sells" soles to the Assembly Division. The market price for the Assembly Division to purchase a pair of soles is $18. (Ignore changes in inventory.) The per unit fixed costs are based on a production of 50,000 pairs of sandals.
Sole's costs per pair of soles are:
Direct materials $5
Direct labour $4
Variable overhead $3
Division fixed costs $1
Assembly's costs per completed pair of sandals are:
Direct materials $6
Direct labour $3
Variable overhead $2
Division fixed costs $2
What is the transfer price per pair of sandals from the Sole Division to the Assembly Division if the method used to place a value on each pair of soles is 150% of variable costs?