San Jose Company operates a Manufacturing Division and an Assembly Division. Bot

Question

San Jose Company 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: Manufacturing Assembly Capacity (units) 419,000 219,000 Sales pricea $ 438 $ 1,395 Variable costsb $ 255 $ 518 Fixed costs $ 40,190,000 $ 24,190,000 a For Manufacturing, this is the price to third parties. b For Assembly, this does not include the transfer price paid to Manufacturing. Required: a. Current production levels in Manufacturing are 219,000 units. Assembly requests an additional 59,000 units to produce a special order. What transfer price would you recommend? b. Suppose Manufacturing is operating at full capacity. What transfer price would you recommend? c. Suppose Manufacturing is operating at 389,500 units. What transfer price would you recommend? (Round your answer to 2 decimal places.)

Explanation / Answer

Part A

Transfer price = 255 (transfer price = variable cost)

Part B

Transfer price = 438 (transfer price = market price)

Part c

Total bases on variable cost =(29500*255)=7522500

Total based on market price =(29500*438)= 12921000

Total units produced = 59000

Transfer price =(7522500+12921000)/59000 = 346.50

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