Spark Ltd has two divisions, assembly and electrical. The assembly division transfers partially completed components to the electrical division at a predetermined transfer price. The assembly division’s standard variable production cost per unit is $550. This division has spare capacity, and it could sell all its components to outside buyers at $680 per unit in a perfectly competitive market.
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Explanation:
The general rule of transfer pricing says that if the organization has idle capacity, then the transfer price will be equal to the cost of producing the product or a Pre -determined transfer price.
The variable cost of production per-unit: $550
Therefore, the transfer price per unit will be $550 or a pre -determined price.
The transfer price should be equal to the standard variable production cost plus contribution
variable standard cost = $550
Contribution = $680 - $550 = $130
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