Question - Transfer Pricing
JayEo Ltd. manufactures string {only} for tennis racquets in their String Division. The Frame Division builds the alloy frames {only}, and then Assembly threads the string into the frames. The retail price of the string is $15 per yard. Production and cost information for the String Division follows:
Yards of String (1 yard per racquet) - 10,000
Direct materials - $45,000
Direct labor - $30,000
Manufacturing overhead (25% is variable) - $80,000
Operating Expenses (15% is variable) - $55,000
The String Division has a current capacity to produce 15,000 yards of string.
Complete the following:
1. Determine the transfer price for a yard of string using each of the following:
a. Market price
b. Variable product costs plus 35%
c. Absorbtion costs plus 12%
d. Variable costs
e. Total costs plus 10%
2. What is the lowest price the String Division should charge for the internal transfer to the Assembly Division?
3. What is the highest price that the Assembly Division should pay for the string?
4. The String Division manager wants to charge the Assembly Division the market price for the string. Would you advise they go with the market price? Why or why not?