Ayle Manufacturing produces parts for farm equipment. The managerial accountant oversees several large departments. The tractor part is produced in the assembly department.

Ayle Manufacturing produces parts for farm equipment. The managerial accountant oversees several large departments. The tractor part is produced in the assembly department. The variable selling expenses and manufacturing costs for the tractor part are listed below:

Ayle Manufacturing Variable Selling Expenses and Manufacturing Costs Specialty Component Production Report
Direct materials	$800
Direct labor	$100
Variable manufacturing overhead	$125
Fixed manufacturing overhead (current production level)	$200
Variable selling expenses (only incurred on sales to outside consumers)	$125

Another division at Ayle Manufacturing could produce the same tractor part internally instead of purchasing the part from an outside supplier. The managerial accountant noted that the other division has excess capacity and could produce the part in that department. There is competition in the marketplace and the current price to product the part at an outside firm is $2,500.

What is the highest transfer price the managerial accountant should pay to purchase the part from a competitor? What is the lowest acceptable transfer price if the part was produced by the internal operations division at Ayle Manufacturing?

Answer

• $25; $12.50
• 
  THE CORRECT ANSWER

  $2,500; $1,025
• 
  YOU WERE SURE AND INCORRECT

  $250; $125
• 
  $25,000; $10,250
• 
  I DON'T KNOW YET

The highest transfer price is $2,500; the lowest transfer price is $1,025. The other answers are not correct.

$800 + $100 + $125 = $1,025