Spa World is a manufacturer of freestanding spa baths. Within the firm, the Pump Department supplies pumps that are used by the Assembly Department. These pumps can be bought and sold on the external market for $375.00 per unit. For sales to external customers, staff from the Pump Department's sales team earn a commission of 10% on the selling price. The manager of the Pump Department is relatively new to the organization. The manager of the Assembly Department has been working at Spa World for many years and is known for its focus on cost control.
The costs incurred by the Pump Department to produce each pump are provided below:

Required:
1. If the transfer price for pump sales between the Pump and Assembly Departments was set through negotiation, discuss what the likely range of transfer prices might be.
Suggest and discuss a reasonable transfer price that would balance the preferences of the Pump and Assembly department managers and illustrate how this could be achieved through cost-plus pricing.
2. Provide and discuss examples (including financial figures and workings) that illustrate how transfer prices for pump sales between the Pump and Assembly departments could be set using the general transfer price rule under the following scenarios:

  

Transcribed Image Text:

Direct materials Direct labour Variable overhead Fixed overheard $80.00 $30.00 $45.00 $22.00 Direct materials Direct labour Variable overhead Fixed overheard $80.00 $30.00 $45.00 $22.00

Answer rating: 100% (QA)

1 Company product Departments variable Cost 2 Manufacturing Cost of pump Selling price 375 155 Contr... View the full answer