Michelle Nicholas is developing a transfer price for the housing section of an automatic garage door opener. The housing for the opener is made in Department H. It is then passed on to Department G, where final assembly occurs. Unit costs for the housing follow.
Cost Categories .................................Unit Costs
Direct materials....................................... $3.00
Direct labor .............................................2.00
Variable overhead......................................1.00
Fixed overhead........................................ 2.50
Profit markup, 25% of cost.............................. ?
An outside vendor can supply the housing for $10.00 per unit.
1. Develop a cost-plus transfer price for the housing.
2. What should the transfer price be? Support your answer.