Accounting for Decision Making and Control 6th Edition by Jerold Zimmerman

Exercise 3

PortCo Products
PortCo Products is a divisionalized furniture manufacturer. The divisions are autonomous segments, each responsible for its own sales, costs of operations, working capital management, and equipment acquisition. Each division serves a different market in the furniture industry. Because the markets and products of the divisions are so different, there have never been any transfers between divisions.
The commercial division manufactures equipment and furniture that is purchased by the restaurant industry. The division plans to introduce a new line of counter and chair units that feature a cushioned seat for the counter chairs. John Kline, the division manager, has discussed the manufacturing of the cushioned seat with Russ Fiegel of the office division. They both believe a cushioned seat currently made by the office division for use on its deluxe office stool could be modified for use on the new counter chair. Consequently, Kline has asked Russ Fiegel for a price for 100-unit lots of the cushioned seat. The following conversation took place about the price to be charged for the cushioned seats.



Required:
a. John Kline and Russ Fiegel ask PortCo corporate management for guidance on an appropriate transfer price. Corporate management suggests they consider using a transfer price based upon opportunity cost. Calculate a transfer price for the cushioned seat based upon variable manufacturing cost plus forgone profits.
b. Which alternative transfer price system-full cost, variable manufacturing cost, or opportunity cost-would be better as the underlying concept for an intracompany transfer price policy Explain your answer.