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Hammer is a large garden equipment supplier with retail stores throughout Toolland. Many of the
products it sells are bought in from outside suppliers but some are currently manufactured by Hammer’s
own manufacturing division “Nail”.Discuss weather or not including fixed cost in transfer price is a sensible policy.
Explanation:One of the main problems with this strategy is that a fixed cost of the business is being turned
into a variable cost in the hands of the seller (in our case the stores). This can lead to poor
decision-making for the group since, although fixed costs would normally be ignored in a
decision (as unavoidable), they would be relevant to the seller because they are part of their
variable buy in price.
Could you please, explain what is meant in explanation, I didn’t get it at all.Could you please, explain what is meant in explanation, I didn’t get it at all
Please don’t ask the same thing twice – it will not get you an answer any faster (we answer within 24 hours – we do not sit in front of the computer permanently 🙂 )
As I explain in my free lectures, we assume that the supplying division is already producing other products and that therefore producing this product will not result in any extra fixed costs. Therefore we base the transfer price only on the marginal cost.
If fixed costs were to be included in the transfer price then it would make the transfer price for each unit higher. So the stores would be paying a higher price per unit, so for them it would be like a variable cost to them.
Thank you,Sir. And I copied last sentence because the message didnt appear at first in the list, so I entered the second one.
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