1. Kappa Construction

Scenario: Transfer Pricing and Divisional Performance Evaluation

Data: Kappa Construction has two divisions: Residential Construction and Commercial Construction. The Residential Construction division produces steel beams that are transferred to the Commercial Construction division for building projects. For the current year, the Residential Construction division reported the following data:

• Variable Cost per Unit: $500
• Fixed Costs: $200,000
• Units Produced: 1,000

Requirements: Determine the transfer price per unit of steel beams for internal transfer between divisions. Analyze the impact of the transfer price on the profitability of both divisions. Discuss the factors that Kappa Construction should consider when setting the transfer price. Evaluate the performance of each division based on the transfer pricing arrangement. Recommend strategies for Kappa Construction to improve divisional performance and optimize internal transfers.