Analyze Transfer Pricing Policy: PortCo Products is a divisionalized furniture manufacturer. The divisions are autono- mous segments, with each division being responsible for its own sales. costs of operations, working capital management, and equipment acquisition. Each division serves a different market in the furniture industry. The commercial division plans to introduce a new line of counter and chair units for the restaurant industry. John Kline, the division manager, discussed the manufac- turing of the new seat with Ruth Fiegel of the office division. They both believe a similar seat currently made by the office division could be modified for use on the new counter chair. Consequently, Kline asked Ruth Fiegel for a price for 100-unit lots of the office division seats. The following conversation took place about the price to be charged for the cushioned seats.

Required: John Kline and Ruth Fiegel asked PortCo corporate management for guidance on an appropriate transfer price. Corporate management suggested they consider using a transfer price based on variable manufacturing cost plus opportunity cost. Calculate a transfer price for the cushioned seat, using variable manufacturing cost plus opportunity cost.

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Fiegel: John, we can easily make the modifications to our seat. The direct materials used in your seat should cost about 10 percent more than those we use. Labor time should be the same. I would price the seat at our regular rate-standard full-absorption cost plus 30 percent markup. Kline: That's higher than I expected, Ruth. I was thinking that a good price would be your variable manufacturing costs. After all, your fixed costs will not be affected by this job. Fiegel: John, I'm at capacity. By making seats for you, I'll have to cut my own production. Of course. I can increase my production of economy office stools. The labor time freed by not having to fabricate the frame or assemble the deluxe stool can be shifted to the frame fabrication and assembly of the economy office stool. Fortunately, I can switch my labor force between these two models of stools without any loss of efficiency. I'd like to sell it to you at variable cost, but I have excess demand for both products. I don't mind changing my product mix to the economy model if 1 get a good return on the seats I make for you. Here are my standard costs for the two stools and a schedule of my manufacturing overhead. [See Exhibit A for standard costs, and see Exhibit B for the overhead budget.] Kline: I guess I see your point, but I don't want to price myself out of the market. Maybe we should talk to corporate headquarters for guidance.