Elba Division of Haimes Industries manufactures product #54B89. Three-fourths of

Question

Elba Division of Haimes Industries manufactures product #54B89. Three-fourths of the production is transferred to the Crete Division of Haimes Industries; the remainder is sold externally for $67 per unit. The following information is available about product #54B89:

total production annually                                                      1,200,000 units
variable production cost                                                          $40
variable selling costs (includes $4 per unit in advertising cost ) $16
fixed overhead (allocated on the basis of units of production) 1,800,000
fixed selling costs                                                                 2,400,000


a. Determine the transfer price under each of the following methods: Round your answers to two decimal places.

(1) Total variable cost (answer is $56 per unit)
(2) Full production cost $ per unit
(3) Total variable production cost plus allocated fixed selling costs $ per unit
(4) Market price(Answer is $67 per unit)

b. What transfer price do you think Elba Division should use to "sell" the units to Crete Division?
$ per unit

Explanation / Answer

1. Total Var cost = Var prod cost pu + Var selling cost pu = 40+16=56 2) Full production cost $ per unit Full Prod cost = No of units*Var prod cost pu + Fixed OH ie Full Prod cost = 1200000*40+1800000 = $49,800,000 So pu Prod cost = Full prod cost/No of units = $49,800,000/1200000 = $41.50 (3) Total variable production cost plus allocated fixed selling costs $ per unit Total Fixed selling cost = 2400,000. So pu Fixed selling cost = 2400,000/1200,000 = $2 pu SO Total Var prod cost = $40 SO Txfer price pu = $40+$2 = $42 (4) Market price(Answer is $67 per unit) This is selling price pu which is given b. What transfer price do you think Elba Division should use to "sell" the units to Crete Division? Elba should use Full Prod cost for internal Txfer as there is no selling expenses incurred. This is $41.50 as calculate above

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