The Windshield division of Fast Car Co. makes windshields for use in Fast Car’s

Question

The Windshield division of Fast Car Co. makes windshields for use in Fast Car’s Assembly division. The Windshield division incurs variable costs of $272 per windshield and has capacity to make 740,000 windshields per year. The market price is $480 per windshield. The Windshield division incurs total fixed costs of $3,700,000 per year.

Assume the Windshield division is operating at full capacity, what transfer price should be used on transfers between the Windshield and Assembly divisions?

Transfer price per windshield:

Explanation / Answer

Since Windshield division is operating at full capacity the transfer price would be the market price of the windshield.

Therefore, the transfer price per windshield is $480 per windshield.

It there is excess capacity, the transfer price would be variable cost of the unit.

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