The Sattle Automobile Company has just acquired a battery division. The company's motor division is presently purchasing 100,000 batteries each year from Bendox Corporation at the price of $24 per battery. Through the acquisition of the battery division top management now feels that the company's motor division should begin to purchase its batteries from the newly acquired battery division. The battery division's cost per battery is as follows:
|
Direct materials
|
$12
|
|
Direct labor
|
4
|
|
Variable overhead
|
2
|
|
Fixed overhead
|
2*
|
|
Total unit cost
|
$20
|
Top management wishes to decide on the transfer price to be charged on the intracompany transfers.
1. Explain why each of the following would or would riot be an appropriate transfer price:
(a) $24
(b) $20
(c) $21
(d) $18
2. Assuming that the battery division is operating at full capacity, explain why each of the transfer prices given in parts l(a) through l(d) would or would not be an appropriate price.