The California Instruments Corporation, a producer of electronic equipment, make
ID: 1255146 • Letter: T
Question
The California Instruments Corporation, a producer of electronic equipment, makes pocket calculators in a plant that is run autonomously.The California Instruments Corporation, a producer of electronic equipment, makes pocket calculators in a plant that is run autonomously. The plant has a capacity output of 200,000 calculators per year, and the plant's manager regards 75 percent of capacity as the normal or standard output. The projected total variable costs for the normal or standard level of output are $900,000, while the total overhead or fixed costs are estimated to be 120 percents of total variable costs. The plant manager wants to apply a 20 percent markup on cost.e) If California Instruments wants to add the pocket calculator to its own product line, what should be the transfer price of the pocket calculators?
Explanation / Answer
plant has a capacity output of 200,000 75 percent of capacity as the normal or standard output = 0.75 x 200,000 = 150000 variable cost = $900,000 fixed costs = 1.2 x variable cost = $1080000 E) 200,000--> $900,000 as variable cost. for profit maximising the unit should run at demand of the market => 150000 calculators are produced so for 150000--> $675000 new price of each unit =($1080000+$675,000)/150000=$11.7 ///****answer $11.7 is the transfer cost. because for transfer cost company has to produce at market demand. definition of transfer cost for reference : In managerial accounting, when different divisions of a multi-entity company are in charge of their own profits, they are also responsible for their own "Return on Invested Capital". Therefore, when divisions are required to transact with each other, a transfer price is used to determine costs. Transfer prices tend not to differ much from the price in the market because one of the entities in such a transaction will lose out: they will either be buying for more than the prevailing market price or selling below the market price, and this will affect their performance.