Division A of the Diamond Company manufactures motors used by other divisions of the company and sold to outside customers. Division B of Diamond Company has requested that Division A supply a certain style of motor, and Division A has computed a proposed transfer price on this motor, as follows:

Management of Division B believes this transfer price is too high because it knows that this style of motor is sold to outside customers for $62 per 800 motors. Management of Division A indicates that it is forced to lower the price below $66 to meet competition. Even though it cannot earn a normal return from outside customers, it believes that Division B should pay for this return.
Required:
Explain what the transfer price should be.

Transcribed Image Text:

Variable cost Fixed cost.. Markup on full cost to provide a normal return Transfer price Per 800 Motors $35 25 $60 6 $66