Neosho Corporation's Gauge Division manufactures and sells product no. 24, which is used in refrigeration systems. Per-unit variable manufacturing and selling costs amount to $23 and $7, respectively. The Division can sell this item to external domestic customers for $40 or, alternatively, transfer the product to the company's Refrigeration Division. Refrigeration is currently purchasing a similar unit from Taiwan for $36. Assume use of the general transfer-pricing rule. Required: A. What is the most that the Refrigeration Division would be willing to pay the Gauge Division for unit? B. If Gauge had excess capacity, what transfer price would the Division's management set? C. If Gauge had no cxecss capacity, what transfer price would the Division's management sct? D. Repeat part "C," assuming that Gauge was able to reduce the variable cost of internal transfers b $5 per unit

(a) Refrigeration would be willing to pay a maximum of Rate 36 to gauge division for unit. because its outside purchase price. (b) $30 (c) $40 (d) $35

Explanation:

Solution

Given that:

(A) The Refrigeration would be willing to pay a maximum of Rate 36 to gauge division for unit. because its outside purchase price.

(B) If Gauge had excess capacity, The Division's Management set the transfer price would be $30. this is because transfer price be set as sum of Total Outlay cost and Opportunity Cost. So, ($23 + $7) + $0 = $30

(C) iF Gauge had no excess capacity, the transfer price would be $40.

The Calculation of Transfer price is as follows:

($23 + $7) = $30

Add : - ($40 - $23 - $7) = $10

Hence, the transfer Price = $40

(D) If Gauge was able to reduce the variable cost of internal transfers b $5 per unit then Transfer Price Would be $35.

Thus,

The calculation of transfer price is as follows:-

($23 + $7 - $5) = $25

Add : - ($40 - $23 - $7) = $10

The transfer Price = $35