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The following case presents hypothetical information regarding the transfer of wheels from the Wheels Department...

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Accounting

The following case presents hypothetical information regarding the transfer of wheels from the Wheels Department to the Assembly Department as part of Tesla's production processes. The costs incurred by Wheels Department to manufacture each wheel is as follows:

Direct materials $350.00
Direct labour $50.00
Variable overhead $60.00
Fixed overheard $55.00

There is an external market for the Wheels Department and the current market price is $800 per wheel. Sales staff earn a commission of $20.00 per wheel for sales to external customers.

Required:

  1. Provide and discuss an example (include financial figures and workings) which illustrates how using cost-plus pricing based on variable costing for the transfer price of wheels could result in issues of goal congruence.
  2. Provide and discuss three examples (include financial figures and workings) which illustrate how transfer prices for wheels could be set using the general transfer price rule and could vary depending on the Wheels Department's capacity. In one of your examples, assume that the Wheels Department has partial spare capacity.

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