Question

The Tires division of Car Company makes tires for use in its Assembly division. The Tires division incurs variable costs of $267 per set of tires and has the capacity to make 1,170,000 sets of tires per year. The market price for tires is $485 per set. The Tires division incurs total fixed costs of $6,170,000 per year. If the Tires division is operating at full capacity, what transfer price should be used on the transfers between the Tires and Assembly divisions

Answer 1

If the Tires division is operating at full capacity, the transfer price that should be used on the transfers between the Tires and Assembly divisions is $485 per set.

What is the acceptable transfer price for this case?

The acceptable transfer price for this case is $485 which represents the variable cost plus opportunity cost.

The above conclusion is based on the transfer price fundamental principle that it should be equal to the price charged to outside customers or purchased from outside vendors.

Thus, the transfer price should be $485 per set.

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