The Fabricating division makes a component part that the Assembly division needs

Question

The Fabricating division makes a component part that the Assembly division needs for a new product. The Fabricating division’s variable cost of manufacturing the component is $23 per unit. The component is also available on the open market at a price of $57 per unit. The Assembly division needs 902 units per year, and the Fabricating division has excess capacity of 1,230 units. (a) Calculate the cost-based transfer price that the Fabricating division should charge the Assembly division. Cost based transfer price $ (b) Calculate the market-based transfer price that the Fabricating division should charge the Assembly division. Market based tranfer price $

Explanation / Answer

No of units assembly department needs                               902.00 Capacity available in fabricating division                           1,230.00 It means Fabricating division has excess capacity Cost Based Transfer Price It is the Transfer price which is computed by taking costs incurred in producing a particular unit Variable cost in Favricating division is                                   23.00 Thus Cost Based Transfer Price is variable Cost                                 23.00 Market Based Transfer Price It is the Transfer price which is computed by taking the price at which unit will be sold in open market   Open Market price                                 57.00 Market based Transfer Price                                 57.00

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