Problem

Sand Company has two divisions, Glass Division and Instrument Division. For several years, Glass Division has manufactured a special glass container, which it sells to Instrument Division at the prevailing market price of $20. Glass Division produces the glass containers only for Instrument Division and does not sell the product to outside customers. Annual production and sales volume is 20,000 containers. A unit cost analysis for Glass Divsion follows:

Cost Catergories / Costs per Container

DM / $3.50

DL, 1/4 hour / 2.30

Variable OH / 7.50

Avoidable FC: $30,000/20,000 units / 1.50

Corporate OH: $3.60 per DL hour / 4.50

Variable shipping costs / 1.20

Total unit cost / $20.50

Corporate OH represents the allocated joint FC of production-building depreciation, property taxes, insurance, and executives' salaries. A profit markup of 20 percent is used to determine transfer prices.

Required:

1. What would be the appropriate transfer price for Glass Division to use in billing its transactions with Instrument Division?

Transfer price (20.50-4.5)(1+.20) = 19.2

2. If Glass Division decided to sell some containers to outside customers, would your answer to requirement 1 change? Defend your response.

3. What factors concerning transfer price should management consider when transferring products between divisions?