Underwood Company Uses Cost-Based Transfer Pricing

Underwood Company uses cost-based transfer pricing. Its Food Processing Division has a standard variable cost of $8.50 per case and allocated fixed overhead of $2.25. The Processing Division, which has excess capacity, sells its output to external customers for $12.00 per case. If Underwood uses full (or absorption) cost as its base, the transfer price charged to its Retail Division should be:

A) $14.25.
B) $12.00.
C) $10.75.
D) $8.50 plus a markup.
E) negotiated between the managers of the Processing and Retail Divisions.

Correct Answer:

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