The Machining Division Makes a Component Part That the Assembly

question 36

Essay

The Machining division makes a component part that the Assembly division needs for a new product.The Machining division's variable cost of manufacturing the component is $25 per unit.The component is also available on the open market at a price of $45 per unit.The Assembly division needs 900 units per year, and the Machining division has excess capacity of 1,000 units.
Required:
a.Determine the cost-based transfer price that the Machining division should charge the Assembly division.
b.Determine the market-based transfer price that the Machining division should charge the Assembly division.
c.What arguments will the Machining division's manager and the Assembly division's manager make in an attempt to get the price each wants?

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Definitions:

Transfer Price

The price charged for goods or services sold between departments or subsidiaries within the same company.

Pump Division

A segment within a company that specializes in the production, sale, and maintenance of pump equipment.

Pool Products Division

A specific division within a company that focuses on the development, production, and sales of products related to swimming pools, such as pool chemicals, filters, and equipment.

Transfer Prices

The prices at which services, goods, or capital are exchanged between divisions within the same company, often used for accounting and tax purposes.