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TRANSFER PRICING

Crosswell Enterprises has two divisions: the Motor Division and the Device Division. The Motor Division manufactures electric motors, which are transferred to the Device Division to make medical devices. The medical devices are sold to the external market for $1050 per unit. While the Motor Division can sell their motors directly to the external market for $380 per unit, it would also incur an additional selling cost of $8 per unit. The standard cost of a medical device is as follows: Motor Division Device Division Direct material $ 80 $ 250 Direct labour $ 50 $ 160 Variable overhead $ 70 $ 190 Fixed overhead $ 110 $ 230 The direct material cost of the Device Division in the table above does not include the transfer price for the motor. Required: (a) Assume that the Motor Division has spare capacity. Calculate the transfer price using the general rule. Show workings. (1 mark) (b) Assume that the Motor Division has no spare capacity. Calculate the transfer price using the general rule. Show workings. (1 mark) (c) Assume that the Motor Division has no spare capacity. Calculate the transfer price if it is based on standard absorption cost plus a 20% markup. Is it likely that the internal transfer will take place? Explain your answer from the perspective of each division

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