Question - Rajdeep Scooters is organized as multiple divisions. All divisions are profit centers. The Engine Division manufactures two-stroke engines used by the assembly division. The market price of the engine is Rs. 18,000 (Rs stands for rupees, the currency in India.) The division's cost sheet contains the following information about an engine's cost:
Item Cost
Direct Materials Rs. 6,000
Direct Labor 3,000
Variable Overhead 1,000
Fixed Overhead 2,000
a. What would be the transfer price if the company uses a policy of setting the transfer price at variable cost plus a 20% markup?
b. What would be the transfer price if the company uses a policy of setting the transfer price at full cost plus 10% markup?
c. Comment on whether either of the above two estimates would be a "fair" transfer price.