Mountain Industries operates a Manufacturing Division and an Assembly Division.

Question

Mountain Industries operates a Manufacturing Division and an Assembly Division. Both divisions are evaluated as profit centers. Assembly buys components from Manufacturing and assembles them for sale. Manufacturing sells many components to third parties in addition to Assembly. Selected data from the two operations follow:

Current production levels in Manufacturing are 100,000 units. Assembly requests an additional 20,000 units to produce a special order. What transfer price would you recommend?

Suppose Manufacturing is operating at full capacity. What transfer price would you recommend?

Suppose Manufacturing is operating at 190,000 units. What transfer price would you recommend?

Mountain Industries operates a Manufacturing Division and an Assembly Division. Both divisions are evaluated as profit centers. Assembly buys components from Manufacturing and assembles them for sale. Manufacturing sells many components to third parties in addition to Assembly. Selected data from the two operations follow:

Explanation / Answer

a) Transfer Price = $40/unit. The company only needs to cover variable costs.

b) $100/unit because at full capacity they use sales or market price.

c) $70/unit. At 190,000 unit production, we have 10,000 units until reaching capacity, so those units will be sold at $40. The remaining 10,000 required units will be produced at full capacity, so they should be sold at $100/unit.

(10,000 x 40 + 10,000 x 100) / 20,000 = unit price

140,000 / 20,000 = $70 per unit

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