The Parts Division of Nydron Corporation makes Part Y6P, which it sells to outside companies for $17.00 per unit. According to t

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The Parts Division of Nydron Corporation makes Part Y6P, which it sells to outside companies for $17.00 per unit. According to t

he cost accounting system, the costs of making one unit of Part Y6P consist of $7.00 for direct materials, $3.00 for direct labor, $4.50 for variable manufacturing overhead, and $1.20 for fixed manufacturing overhead. The Parts Division has enough idle capacity to make 1,000 units of Part Y6P each month. The Assembly Division of Nydron Corporation can use Part Y6P in one of its products. At present, the Assembly Division is purchasing an equivalent part from an outside supplier for $16.85 per unit. The Assembly Division needs 2,000 units of the part each month. It has been suggested that the Assembly Division buy Part Y6P from the Parts Division instead of buying the equivalent part from the outside supplier. The transfer price for this transaction would lie within what limits?

Business

1 answer:

Katen [3.5K] · Answer 1 · 2026-03-22T18:47:15+03:00

Answer:

The Parts Division of Nydron Corporation

The transfer price applicable to this transaction should range from $16.85 to $17.00.

Relevant costs for producing Part Y6P per unit are determined as variable or marginal costs:

Sales price to external companies = $17

Cost price from external supplier = $16.85

Marginal Costs:

Direct Materials $7

Direct Labor $3

Variable Manufacturing Overhead $4.50

Total Variable Costs = $14.50

Fixed Costs = $1.20

Total Costs = $15.20

Explanation:

This is a decision related to transfer pricing in a make-or-buy scenario. Management at Nydron Corporation should focus on relevant costs as well as the minimum and maximum transfer pricing. The costs that matter are those that could be avoided, known as avoidable costs, which influence decision-making. Since relevant costs amount to $14.50 (excluding the must-have fixed cost of $1.20, which remains constant regardless of the decision), and the part can be sold for $17.00 to customers outside, the transfer price will fall between the relevant manufacturing costs and the external sale price. Given that the part can be sourced from outside at $16.85, this sets the lower limit for the transfer price, while $17.00 becomes the cap.

The transfer price is defined as the amount one division can charge another division within the same company, as well as between subsidiaries and parent companies. Transfer pricing is a practice used for accounting and taxation that establishes prices for transactions conducted internally within companies and between subsidiaries under the same ownership. This practice encompasses both domestic and international transactions and carries tax implications.