Alpha Corporation is a manufacturer of bicycles with two divisions. The frame division produces the bicycle...

 

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Alpha Corporation is a manufacturer of bicycles with two divisions. The frame division produces the bicycle frames, which are then transferred to the finishing division, which installs the tyres and other accessories. The company's best-selling product is the famous BMX bicycle. The frame division also sells its frames directly to other bicycle manufacturers, who install their own tyres and accessories, and brand it with their own names. The sales price for a frame is £80. The finishing division sells its finished bicycle for £190 The standard cost of bicycle is detailed as follows Division Frame Division Finishing Direct material £15 £30⁰ Direct labor £20 EIS Variable overhead £30 £30 Total £65 £75 *Excluding the cost of material transferred from the frame division. Required: a) Assume that the frame division has no excess capacity. i) Use the general transfer pricing principle to compute the transfer price for frame division. ii) Calculate the transfer price if it is based on standard variable cost with a 10 percent markup. Will the Frame Division accept the transfer at this price? b) Assume that the frame division has excess capacity. i) Use the general transfer pricing principle to compute the transfer price for frames. ii) Explain why your answers to requirements (ai) and (bi) differ iii) Suppose that the predetermined fixed-overhead rate in the frame division is 125% of direct-labor cost. Calculate the transfer price if it is based on standard full cost plus 10% markup. Alpha Corporation is a manufacturer of bicycles with two divisions. The frame division produces the bicycle frames, which are then transferred to the finishing division, which installs the tyres and other accessories. The company's best-selling product is the famous BMX bicycle. The frame division also sells its frames directly to other bicycle manufacturers, who install their own tyres and accessories, and brand it with their own names. The sales price for a frame is £80. The finishing division sells its finished bicycle for £190 The standard cost of bicycle is detailed as follows Division Frame Division Finishing Direct material £15 £30⁰ Direct labor £20 EIS Variable overhead £30 £30 Total £65 £75 *Excluding the cost of material transferred from the frame division. Required: a) Assume that the frame division has no excess capacity. i) Use the general transfer pricing principle to compute the transfer price for frame division. ii) Calculate the transfer price if it is based on standard variable cost with a 10 percent markup. Will the Frame Division accept the transfer at this price? b) Assume that the frame division has excess capacity. i) Use the general transfer pricing principle to compute the transfer price for frames. ii) Explain why your answers to requirements (ai) and (bi) differ iii) Suppose that the predetermined fixed-overhead rate in the frame division is 125% of direct-labor cost. Calculate the transfer price if it is based on standard full cost plus 10% markup.

Answer rating: 100% (QA)

a i The general transfer pricing principle is that the transfer price should be set at a level that will cover all of the incremental or variable costs incurred by the selling division In this case th... View the full answer