Scottsdale Manufacturing is organized into two divisions: Fabrication, and Assembly. Components transferred between the two divisions are recorded at a predetermined transfer price. Standard variable manufacturing cost per unit in the Fabrication Division is $500. At the present time, this division is working to capacity. Fabrication estimates that the units it produces could be sold on the external market for $650. The product under consideration is viewed as a commodity-type product, with no differentiating features or characteristics.
Standard variable manufacturing cost per unit, Fabrication Division =..................$500
Current external market price per unit =.......................................................$650
Requirements
1. What roles are played by transfer prices? That is, why are transfer prices needed?
2. Use the General Transfer Pricing Rule presented in the chapter to determine an appropriate transfer price. Why (or in what sense) is the amount you calculated considered an appropriate transfer price?
3. What if the Fabrication Division had excess capacity? How would this change the indicated transfer price? Why is the amount you determined considered an appropriate transfer price?
4. Are there any downsides of using the General Transfer Pricing Rule to determine the transfer price for internal transfers?