Question

the windshield division of jaguar company makes windshields for use in its assembly division. the windshield division incurs variable costs of $284 per windshield and has capacity to make 640,000 windshields per year. the market price is $560 per windshield. the windshield division incurs total fixed costs of $3,100,000 per year. if the windshield division is operating at full capacity, what transfer price should be used on transfers between the windshield and assembly divisions?

Answer 1

The transfer price could potentially be set at the market price of $560, at marginal cost ($284), or at full cost (variable plus allocated fixed costs). However, without explicit company policies on transfer pricing, a definitive answer cannot be provided.

Step-by-step explanation:

Calculating Transfer Price

To calculate the transfer price for the windshield divisions of Jaguar Company, we need to consider both variable and fixed costs. If the windshield division operates at full capacity of 640,000 windshields, the total variable cost would be \(640,000 \times $284\), and the total fixed cost is $3,100,000. The market price is $560 per windshield.

However, the question does not provide enough information to determine a transfer price. Typically, the transfer price could be set at marginal cost (variable cost), full cost (variable cost plus allocated fixed costs), or market price. To promote fairness and motivate performance, it is common to set the transfer price at market price or marginal cost. If the division is operating at full capacity, it might be reasonable to use market price or full cost as the transfer price since there is an opportunity cost of not selling those windshields on the open market.

Without specific company policies or additional context, it is challenging to provide a definitive answer. Companies often balance internal considerations, such as encouraging efficiency, with external market conditions when setting transfer prices.