Todd Inc. is in the process of developing a transfer price for a part produced b
ID: 2382241 • Letter: T
Question
Todd Inc. is in the process of developing a transfer price for a part produced by Dept. A and used by other departments in manufacturing various products. Unit costs for the part are as follows:
Cost Categories:
Direct Materials=$8.10
Direct Labor=7.00
Variable OH=4.50
Fixed OH=4.40
Profit Markup(30 percent of cost)=?
Dept. B can purchase the part from an outside supplier at $29.50 per unit.
a) Develop the cost-plus transfer price for the part.
b) What should be the transfer price? Support your answer.
Explanation / Answer
A
Total Cost / Unit = 8.10 + 7 + 4.50 + 4.40 = $24
Profit = 30% of Cost = 0.3*24 = $7.2 / unit
The cost-plus transfer price is : 24 + 7.2 = $31.2 / unit
B
Dept A should supply Dept B at a transfer price of $29.5 / unit, the market selling price. This is because, if it charges a higher price of $31.2 Dept B shall order it from an outside supplier. If, they charge $29.5 / unit, then they wil be getting a profit of $5.5 / unit (29.5-24) which they might lose out.
Hence, the transfer price should be $29.5 / unit