Diesel engines made at Ford’s engine plant have a variable cost $500 to manufacture. Assuming they charge a mark up of $200 per unit, the minimum transfer price they would want to charge to an assembly plant within Ford is $700.

2. The maximum transfer price

Using the Ford example, if the same diesel engine could be bought on the open market for $800, this is the maximum an assembly plant would pay the engine plant.

The ideal transfer price would need to fall between $700 and $800 per engine because the engine plant would not sell below $700 (as they could receive a higher price externally) and the assembly plant will not pay more than $800 (as otherwise they could buy the engine cheaper on the open market).

For extra info on the above topic, and other costing topics, check out the website that explained to me the above: http://www.managementaccountingmastery.com/cima-p3-how-to-calculate-a-transfer-price-matts-complete-guide/

EOQ = SQRT(2 × 20,000 × 400/10) = 1,265 units

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Apologies for late help, Oliver! Busy time for us all:( 

Economic order quantity (EOQ) is the order quantity of inventory that minimizes the total cost of inventory management.  Example:

ABC Ltd. is engaged in sale of footballs. Its cost per order is $400 and its carrying cost unit is $10 per unit per annum. The company has a demand for 20,000 units per year. Calculate the order size, total orders required during a year, total carrying cost and total ordering cost for the year.

Solution: EOQ = SQRT(2 × 20,000 × 400/10) = 1,265 units

Annual demand is 20,000 units so the company will have to place 16 orders (= annual demand of 20,000 divided by order size of 1,265). Total ordering cost is hence $64,000 ($400 multiplied by 16).

Average inventory held is 632.5 ((0+1,265)/2) which means total carrying costs of $6,325 (i.e. 632.5 × $10).

Market-based transfer prices: Transfer price is set at the market price - the price of a similar product or service that is on the open market. It can also earn the highest possible profit, rather than being subject to the odd profit vagaries that can occur under mandated pricing schemes.

Cost-based transfer prices : Transfer price is determined based on the costs of producing the intermediate product. This means that the final subsidiary that sells the completed goods to a third party will recognize the entire profit associated with the product.

Negotiated transfer prices : A negotiated transfer price comes from discussions between the selling and buying division. Individual divisions are free to negotiate the transfer price and also to decide whether to buy and sell internally or external. Transfer price amount may or may not resemble the cost or market data costs. Often used when market prices are volatile.

Upper limit (the max):  determined by the buying division

The lower limit (the min): determined by the selling division. Minimum TP = VC + lost CM 
 

 

Rework is the conversion of production rejects into reusable products of the same or lower quality. An example of this is leftover ground raw poultry that can be cooked and processed into chili.

This website should also help in accounting for spoilage and reworked in a job-costing system. It goes over the necessary journal entries that are needed. 

 

http://nraomtr.blogspot.ca/2011/12/costing-for-spoilage-rework-and-scrap.html