Question 1. Transfer pricing Hercules Metal Pty Ltd. has two production departments: crater department and dollar department. The crater department produces and transfers partially completed components to the dollar department at a pre-agreed transfer price. It could also sell these components to outside buyers at $550 per unit in a perfectly competitive market. The standard cost per unit in each division is as follows: Direct material Direct labour Manufacturing overhead *Manufacturing overhead is 70% variable and 30% fixed. **Manufacturing overhead is 45% variable and 55% fixed. Required: The dollar department can sell the finished product to outsiders at $1,420 per unit. Crater department $180 $192 $187.5* a. What transfer price would you recommend if there was no outside market for the partially completed component and the crater department had spare capacity? Does it matter if the crater department is identified as a cost centre or a profit centre? Explain your answer. Advise office to Your Dollar departement $384 $264 $129** b. Assume that the head office has intervened to dictate the transfer price at standard absorption cost plus a 5% mark up at least. The dollar department has been approached with a special order for 2,000 components at $1,350 each. From the perspective of Hercules Metal as a whole, should the special order be accepted or rejected? Explain and show the supporting calculations. whether dictate answer. 4 is desirable for the head transfer price? Explain the

Question 1. Transfer pricing Hercules Metal Pry Ltd. has two production departments; crater department and dollar department. The crater department produces and transfers partially completed components to the dollar department at a pre-agreed transfer price. It could also sell these components to outside buyers at $50 per unit in a perfectly competitive market. The standard cost per unit in each division is as follows: * Mamufacturing overhead is 70% variable and 30% fixed. *Manufacturing overhead is 45% variable and 55% fixed. The dollar department can sell the finished product to outsiders at $1,420 per unit. Required: a. What transfer price would you recommend if there was no outside market for the partially completed component and the crater department had spare capacity? Does it matter if the crater department is identified as a cost centre or a profit centre? Explain your answer. b. Assume that the head office has intervened to dictate the transfer price at standard absorption cost plus a 5% mark up at least. The dollar department has been approached with a special order for 2,000 components at $1,350 each. From the perspective of Hercules Metal as a whole, should the special order be accepted or rejected? Explain and show the supporting calculations. c) Advise whether is desirable for the head office to dictate the transfer price? Epphin your