The Heating Division of Kobe International produces a heating element that it se

Question

The Heating Division of Kobe International produces a heating element that it sells to its customers for $48 per unit. Its variable cost per unit is $26, and its fixed cost per unit is $9. Top management of Kobe International would like the Heating Division to transfer 15,400 heating units to another division within the company at a price of $25. The Heating Division is operating at full capacity. Assume that the units being requested are special high-performance units and that the division's variable cost would be $24 per unit (rather than $26). What is the minimum transfer price that the Heating Division should accept?

Explanation / Answer

Answer

calculate the minimum transfer price as shown below

minimum transfer price = variable cost per unit + opportunity cost per unit

= 26 + ( 48 - 26 )

= 48

opportunity cost per unit = contribution margin per unit

= selling price per unit - variable cost per unit

= 48 - 26

= 26

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