Illinois Metallurgy Corporation has two divisions. The Fabrication Division transfers partially completed components to the Assembly Division at a predetermined transfer price. The Fabrication Division’s standard variable production cost per unit is $300. The division has no excess capacity, and it could sell all of its components to outside buyers at $380 per unit in a perfectly competitive market.

Required:

1. Determine a transfer price using the general rule.

2. How would the transfer price change if the Fabrication Division had excess capacity?