Pertinent transfer price. ITS Automotive plant in Bradford manufactures car seats. It has two divisions, Frames and Seats. The Frames Division produces the structural frame of the seat, and the Seats Division assembles all the parts and mechanisms onto the frame. There is a market for both the subassembly and the final product. Each division has been designated as a profit centre. The transfer price for the subassembly has been set at $240 and includes all intermediate products (engines, recliners, frames, etc.), while the long-run average market price for the assembled seat is estimated at $360. The manager of Seats Division has made the following calculation:

REQUIRED 1. Should transfers be made to Seats Division if there is no excess capacity in Frames Division?
Is the market price the correct transfer price?
2. Assume that the maximum capacity of the Frames Division for this product is 1,000 units per month and sales to the intermediate market are now 800 units. Should 200 units be transferred to Seats Division? At what transfer price? Assume that, for a variety of reasons, Frames Division will maintain the $240 selling price indefinitely;
that is, Frames Division is not considering lowering the price to outsiders even if idle capacity exists.
3. Suppose Frames Division quoted a transfer price of $180 for up to 200 units. What would be the contribution to the company as a whole if the transfer were made? As manager of Seats Division, would you be inclined to buy at $180?LO1

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Estimated selling price of the assembled seat Transferred-in costs at market price Incremental costs for completion in the Division Contribution (loss) on product $360 $240 180 $(60)