(Transfer pricing) Irmela Division, a subsidiary of Siberia Ltd., manufactures computer chips with the following costs:

Some of the chips are sold externally for $108.75; others are transferred in¬ ternally to the Gerhardt Division. Irmela Division’s plant manager wants to establish a reasonable transfer price for chips transferred to Gerhardt. The purchasing manager of Gerhardt Division has informed the plant manager that comparable chips can be purchased externally in a price range from $75 to $115.

a. Determine the upper and lower limits for the transfer price between Irmela Division and Gerhardt Division.

b. If Irmela Division is presently selling all the chips it can produce to external buyers, what minimum price should be set for transfers to Gerhardt Division? LO.1

Transcribed Image Text:

Direct material $10.00 Direct labor 17.50 Variable overhead 8.50 Fixed overhead 12.00 Total $48.00