Question

The windshield division of Fast Car Co. makes windshields for use in Fast Car’s assembly division. The windshield division incurs variable costs of \(200 per windshield and has capacity to make 500,000 windshields per year. The market price is \)450 per windshield. The windshield division incurs total fixed costs of $3,000,000 per year. If the windshield division has excess capacity, what is the range of possible transfer prices that could be used on transfers between the windshield and assembly divisions? Explain.

Short answer

The range of transfer price will be$200 to $450.

Step-by-step solution

Definition of Fixed Cost

The cost incurred by the business entity that does not increase or decrease due to any change in activity level is known as a fixed cost.

Determination of transfer price

Here, the business entity is not operating at its full capacity. In that case, the transfer price's minimum value will equal the variable cost incurred to produce one windshield, and the maximum price will be equal to the market price. Therefore, the transfer price will fall between $200 to $450. Fixed cost is ignored because it is irrelevant.