Cylinder Company has two divisions, Glass Division and Instrument Division. For several years, Glass Division has manufactured

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Cylinder Company has two divisions, Glass Division and Instrument Division. For several years, Glass Division has manufactured a special glass container, which it sells to Instrument Division at the prevailing market price of $20. Glass Division produces the glass containers only for Instrument Division and does not sell the product to outside customers. Annual production and sales volume is 20,000 containers. A unit cost analysis for Glass Division showed the following:

Cost Categories Costs per Container

Direct materials .................... $3.50

Direct labor, 1 1/4 hours ................. 2.30

Variable overhead .................... 7.50

Avoidable fixed costs

$30,000 ÷ 20,000 ...................... 1.50

Corporate overhead, $18 per direct labor hour ........ 4.50

Variable shipping costs ................. 1.20

Unit cost ......................$20.50

Corporate overhead represents the allocated joint fixed costs of production— building depreciation, property taxes, insurance, and executives’ salaries. A profit markup of 20 percent is used to determine transfer prices.

Required

1. What would be the appropriate transfer price for Glass Division to use in billing its transactions with Instrument Division?

2. If Glass Division decided to sell some containers to outside customers, would your answer to 1 change? Defend your response.

3. Manager Insight: What factors concerning transfer price should management consider when transferring products between divisions?

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Related Book For  book-img-for-question

Managerial Accounting

ISBN: 9780538742801

11th Edition

Authors: Susan V. Crosson, ‎ Belverd E. Needles

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