Evaluate Transfer Pricing System
Division A offers its product to outside markets for $30. It incurs variable costs of $11 per unit and fixed costs of $75,000 per month based on monthly production of 4,000 units. Division B can acquire the product from an alternate supplier for $31 per unit or from Division A for $30 plus $2 per unit in transportation costs in addition to the transfer price charged by Division A.
Required
a. What are the costs and benefits of the alternatives available to Division A and Division B with respect to the transfer of Division A’s product? Assume that Division A can market all that it can produce.
b. How would your answer change if Division A had idle capacity sufficient to cover all of Division B’s needs?