The Wood Parts Division of Alpha Company Sells All of Its

question 43

Essay

The Wood Parts Division of Alpha Company sells all of its output to the Finishing Division of the company. The only product of the Wood Parts Division is chair legs that are used by the Finishing Division. The retail price of the legs is $20 per leg. Each chair completed by the Finishing Division requires four legs. Production quantity and cost data are as follows: $\begin{array}{lr}\text { Number of chair legs produced each year } & 30,000 \\\text { Direct materials } & \$ 135,000 \\\text { Direct labour } & \$ 90,000 \\\text { Manufacturing overhead (25\% is variable) } & \$ 90,000\end{array}$ Required: Compute the transfer price for a chair leg using:
A. Market price
B. Variable product costs plus a fixed fee of 20%
C. Full cost plus 20% markup
D. Variable costs

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Definitions:

Monopoly

A market structure characterized by a single seller, selling a unique product in the market without any close substitutes.

Price Taker

A market participant that accepts market prices as given and has no influence to alter the price of the good or service.

Buyer

A person or organization that purchases goods or services.

Law Of Demand

The economic principle stating that, all else being equal, as the price of a good or service decreases, consumer demand for it will increase, and vice versa.