E8-11. Allied Company\'s Small motor division manufactures a # of small motors u

Question

E8-11. Allied Company's Small motor division manufactures a # of small motors used in household and office appliances. The Household Division of Allied 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.
(A) assuming the small motor div. has excess capacity, compute the minimum acceptable price for the transfer of small motor LN233 to the Household Division.
(B) assuming - small motor div. does not have excess capacity, compute the minimum acceptable price for transfer of the motor to household div.
(C) explain why the level of capacity in small motor div. has and effect on the transfer price.

Explanation / Answer

A.) Transfer price when the company has excess capacity: As the small motor divison has excess capacity, then we have to use the following formula to determine the transfer price, Minimum transfer price = Variable cost + opportunity cost Here variable cost per unit = $8 Opportunity cost (contribution margin) = $0 (at excess capacity) So minimum transfer price at excess capacity = $8. As the small motor divison has excess capacity, then we have to use the following formula to determine the transfer price, Minimum transfer price = Variable cost + opportunity cost Here variable cost per unit = $8 Opportunity cost (contribution margin) = $0 (at excess capacity) So minimum transfer price at excess capacity = $8. B.) Transfer price when the company has no excess capacity: At no excess capacity, the company will produce and sells only the limited units. Here the company should receive all the variable costs and contribution margin to cover its costs. If the small division cannot cover that amount -called minmu transfer price it should not sell its products. Here the opportunity cost = selling price - variable cost                                        = 30 - 8 Opportunity cost             = $22 So Minimum transfer price = Variable cost + Opportunity cost                                          = $8 + 22 Minimum transfer price      = $30

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.