What should the transfer price be and why?

Managerial Accounting: The Cornerstone of Business Decision-Making
7th Edition
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Chapter11: Performance Evaluation And Decentralization
Section: Chapter Questions
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What should the transfer price be and why?

The Top Division of C. Can Company manufactures metal tops that are used by other divisions of
C. Can Company and that also are sold to external customers. The Hardware Division of C. Can
Company has requested the Top Division to supply a certain top, Style H, and the Top Division
has computed a proposed transfer price per thousand tops, as follows:
Variable cost
Fixed cost
$195
21
Total cost
216
Profit (to provide normal return on assets employed)
Transfer price
40
$256
The Hardware Division is unwilling to accept this transfer price because Style H tops are
regularly sold to outside customers for $239 per thousand. The Top Division points out, however,
that competition for this top is unusually keen, and that this is why it cannot price the top to
external customers so as to earn a normal return. Both divisions are profit centers.
Transcribed Image Text:The Top Division of C. Can Company manufactures metal tops that are used by other divisions of C. Can Company and that also are sold to external customers. The Hardware Division of C. Can Company has requested the Top Division to supply a certain top, Style H, and the Top Division has computed a proposed transfer price per thousand tops, as follows: Variable cost Fixed cost $195 21 Total cost 216 Profit (to provide normal return on assets employed) Transfer price 40 $256 The Hardware Division is unwilling to accept this transfer price because Style H tops are regularly sold to outside customers for $239 per thousand. The Top Division points out, however, that competition for this top is unusually keen, and that this is why it cannot price the top to external customers so as to earn a normal return. Both divisions are profit centers.
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