Cawley Company\'s Small Motor Division manufactures a number of small motors use

Question

Cawley Company's Small Motor Division manufactures a number of small motors used in household and office appliances. The Household Division of Cawley then assembles and packages such items as blenders and juicers. Both divisions are free to buy and sell any of their components internally or externally. The following costs relate to small motor LN233 on a per unit basis.

Fixed cost per unit $5
Variable cost per unit 8
Selling price per unit 30


Assuming that the Small Motor Division has excess capacity, compute the minimum acceptable price for the transfer of small motor LN233 to the Household Division.

$



Assuming that the Small Motor Division does not have excess capacity, compute the minimum acceptable price for the transfer of the small motor to the Household Division.

$




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Explanation / Answer

(i) Fixed cost per unit $5 Variable cost per unit $8 Selling price per unit $30 since there is excess capacity the minimum acceptable price for the transfer of small motor LN233 to the Household Division will be the variable cost only,ie, $8 (ii) when there is no excess capacity, then minimum acceptable price for the transfer of small motor LN233 to the Household Division will be the selling price,ie, $30.

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