Overton 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 Overton uses variable costs as its base, the transfer price charged to its Retail Division should be:
A. $10.75 plus a markup.
B. $8.50 plus a markup.
C. $12.00 plus a markup.
D. $14.25.
E. negotiated between the managers of the Processing and Retail Divisions.
Answer: B
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