Reference no: EM132566888

The Indian Spirit Company is operating with two divisions. Division H is producing a product line that is required as a component part of the product being manufactured by Division W. For Division H, the costs of producing the component part per unit are:

Direct materials P 10

Direct labor P 8

Variable factory overhead P 5

Fixed factory overhead P 2

The product of Division H is being sold in a highly competitive market for P 30 per unit. Division W is currently buying 80% of the production output of Division H at a negotiated price of P28 per unit. It is expected that 25,000 units of product will be produced by Division H. With emphasis on divisional welfare rather than the company's welfare, a new transfer price must be developed. It is suggested that a 40% mark-up on cost will be added when transferring the product from Division H to Division W.

An additional processing cost for Division W is P 8 per unit. The selling price of the product of Division W is P 45 per unit.

REQUIRED:

Question 1: Determine the gross profit per unit of the product from Division W under each of the following independent assumptions:

A) Transfer price is full-cost based.

B) Transfer price is cost-based plus mark-up.

C) Transfer price is based on a negotiated price.

D) Transfer price is market-based.