The Engine Division provides engines for the Tractor Division of a company. The standard unit costs for the Engine Division are: Direct materials $700 Direct labor 1,300 Variable overhead 400 Fixed overhead 200 Market price per unit 3,200 The Engine Division has excess capacity. What is the best transfer price to avoid transfer price problems? a. $2,400 b. $900 c. $300 d. $1,350

option (a) is correct, $ 2400

Explanation:

Given:

Direct materials cost = $ 700

Direct labour cost = $ 1300

Variable overhead = $ 400

Transfer price is relevant cost for Engine division

Now,

the relevant cost is variable cost

Also, variable cost is given as;

variable cost = Direct material + Direct labor + Variable overhead

on substituting the values in the above formula, we get

variable cost = $ 700 + $ 1,300 + $ 400

or

variable cost = $ 2400

Hence, option (a) is correct