General Transfer Pricing Rule Scottsdale Manufacturing is organized into two divisions:Fabrication and Assembly. Components transferred between the two divisions are recorded at a predetermined transfer price. Standard variable manufacturing cost per unit in the Fabrication Divisionis $500. At the present time, this division is working to capacity. Fabrication estimates that the unitsit produces could be sold on the external market for $650. The product under consideration is viewedas a commodity-type product, with no differentiating features or characteristics.Required1. What roles are played by transfer prices? That is, why are transfer prices needed?2. Use the general transfer pricing rule presented in the chapter to determine an appropriate transfer price.Why is the amount you calculated considered an appropriate transfer price?3. What if the Fabrication Division had excess capacity? How would this change the indicated transferprice? Why is the amount you determined considered an appropriate transfer price?4. Are there any downsides of using the general transfer pricing rule to determine the transfer price forinternal transfers?
General Transfer Pricing Rule Scottsdale Manufacturing is organized into two divisions:
Fabrication and Assembly. Components transferred between the two divisions are recorded at a predetermined transfer price. Standard variable
is $500. At the present time, this division is working to capacity. Fabrication estimates that the units
it produces could be sold on the external market for $650. The product under consideration is viewed
as a commodity-type product, with no differentiating features or characteristics.
Required
1. What roles are played by transfer prices? That is, why are transfer prices needed?
2. Use the general transfer pricing rule presented in the chapter to determine an appropriate transfer price.
Why is the amount you calculated considered an appropriate transfer price?
3. What if the Fabrication Division had excess capacity? How would this change the indicated transfer
price? Why is the amount you determined considered an appropriate transfer price?
4. Are there any downsides of using the general transfer pricing rule to determine the transfer price for
internal transfers?
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