Delta Company sells bells to customers for $1 each. The variable cost to manufacture the bells is 10 cents. If the rattle department, a division of the Delta Company, wants to use the bells in its new line of rattles, which of the following transfer prices can be used if there is excess capacity?
Question
Delta Company sells bells to customers for $1 each. The variable cost to manufacture the bells is 10 cents. If the rattle department, a division of the Delta Company, wants to use the bells in its new line of rattles, which of the following transfer prices can be used if there is excess capacity?
Solution
The transfer prices that can be used if there is excess capacity are:
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Market Price: This is the price at which the bells are sold to customers, which is $1. This price can be used as a transfer price if the company wants to simulate a market environment within its divisions.
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Variable Cost: This is the cost to manufacture the bells, which is 10 cents. This price can be used as a transfer price if the company wants to only cover the cost of production.
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Negotiated Price: This is a price that is agreed upon by the rattle department and the bell manufacturing division. This price can be anywhere between the variable cost and the market price, depending on the negotiation.
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Cost Plus: This is the variable cost plus a certain percentage. This price can be used as a transfer price if the company wants to cover the cost of production and also make a profit.
So, the transfer price can be anywhere between 10 cents (variable cost) and $1 (market price), depending on the company's internal policies and the negotiation between the two divisions.
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