a company has two divisions, A and B. Division A manufactures a component which is transferred to division B.Division B uses two units of the component from Division A in every item of finished product that it makes and sells. The transfer price is $43 per unit of the component
Selling price of finished product made in Division B--------------------------------------------------154$
Variable production costs in Division B excluding the cost of transfers from Div..A------------32
Variable selling costs chargeable to the division-------------------------------------------------1
Fixed costs-------160000
External sales in units-----7000
Investment in division -500000
cost of capital---16%
Solution
Sales(7000*154)------------1078
Variable cost in Division B(7000*33)
Costs of Transfer(14000*43)
Here my question is that if Division B uses two units of the component from Division A in every item of finished product that it makes and sells then:
The below 32$ is my 7000 units production cost
1) Variable production costs in Division B excluding the cost of transfers from Div..A------------32
2)Variable selling costs chargeable to the division-------------------------------------------------1
Why i charge here 1$ on 7000 units not 14000 units?in facts If i buy 14000 units from internal division and the selling and distribution cost from Division A is 1$ then it should be 14000*1$
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Transfer price
5y ago#1B is incurring the selling and distribution costs and they are selling 7,000 units. The fact that each unit uses 2 components has no relevance to the selling and distribution costs for B.
Dear Tutor, if I sell 7000 units to the external market and If i buy 14000 units from division A,if division A charges 1 $ for internal transfer why i use 7000 unirts not 14000 units is really not understadable.
5y ago#3Read again the first line of my previous reply.
The question does not say anywhere that division A charges $1 for internal transfer!!! It says that the selling and distribution costs are $1 and is division B that will insure those charges because it is Division B that is selling to outside customers.
Dear Tutor understood thank you very much
5y ago#5You are welcome :-)
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