The Heating Division of KLM International produces a heating element that it sel

Question

The Heating Division of KLM International produces a heating element that it sells to its customers for $45 per unit. Its variable cost per unit is $21, and its fixed cost per unit is $12. Top management of KLM International would like the Heating Division to transfer 13,800 heating units to another division within the company at a price of $30. The Heating Division has sufficient excess capacity to provide the 13,800 heating units to the other division. What is the minimum transfer price that the Heating Division should accept? Minimum transfer price

Explanation / Answer

Answer:

Transfer price is the price at which the price of the product should benchmarked to benefit botht he units and can avoid double taxation.Therefore in the given problem we have to find out the minimum transfer price that the unit should accept:

We need to calculate the opportunity cost of not producing the goods and selling outside

Opportunity cost could be taken only if there is full capacity and demands are more than the supplies and no excess supplies are available.

Therefore the cost involved would be

Variable Cost                 21

Opportunity Cost             0 (Because surplus is there)

Fixed cost                     0 ( Because anyway the company is going to incur)

Therefore the iinimum at which the division should accept is variable cost ie $21

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