12 * Based on production of 75,000 and 120,000 gallons for P and R respectively. P Division produces 75,000 gallons per month. R Division uses 120,000 gallons per month; of that, 75,000 gallons are purchased internally and 45,000 are purchased
Transfer pricing
Mogi Corp. manufactures one primary product, which is processed through two divisions (P and R). Costs for each division are:
| P | R | |
|---|---|---|
| Variable cost per gallon | $3 | $15 |
| Fixed cost per gallon* | 2 | 12 |
* Based on production of 75,000 and 120,000 gallons for P and R respectively.
P Division produces 75,000 gallons per month. R Division uses 120,000 gallons per month; of that, 75,000 gallons are purchased internally and 45,000 are purchased externally at $10 per gallon. After processing through R Division, a gallon of final product can be sold for $55.
a. What would be P’s transfer price to R Division if the price is set at 180 percent of variable cost? $Answer
b. What would be P’s transfer price to R Division if the price is set at 130 percent of full cost? $Answer
c. What would be P’s transfer price to R Division if the price is set at market value? $Answer
d. What is Mogi Corp.’s operating profit if all 120,000 gallon of final product can be sold for $55 per gallon? $Answer
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