Underwood Company Uses Cost-Based Transfer Pricing

question 24

Multiple Choice

Underwood Company uses cost-based transfer pricing. Its Food Processing Division has a standard variable cost of $8.50 per case and allocated fixed overhead of $2.25. The Processing Division, which has excess capacity, sells its output to external customers for $12.00 per case. If Underwood uses variable costs as its base, the transfer price charged to its Retail Division should be:

• A) $14.25.
• B) $12.00 plus a markup.
• C) $10.75 plus a markup.
• D) $8.50 plus a markup.
• E) negotiated between the managers of the Processing and Retail Divisions.

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Definitions:

Productivity

The measure of the efficiency of production, often quantified as the ratio of outputs produced to inputs used in the production process.

Factor Labor

This refers to the human effort, both physical and mental, used in the production of goods and services.

Market Wage

The prevailing rate of pay for given types of work or specific occupations in a particular geographic or sectoral labor market.

Brewmasters

Brewmasters are professionals skilled in the brewing of beer, overseeing the production process from ingredient selection to fermentation and final product tasting.