Chen Company\'s Small Motor Division manufactures a number of small motors used

Question

Chen Company's Small Motor Division manufactures a number of small motors used in household and office appliances. The Household Division of Chen 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. 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. (Round answer to 2 decimal places, e.g. 10.50.) 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. (Round answer to 2 decimal places, e.g. 10.50.)

Explanation / Answer

Minimum acceptable price would be the cost incurred to manufacture motors for household division Since it has excess capacity there would not be loss of revenue   Thus Min Transfer price =Variable Cost = 10.81 Minimum acceptable price would be the cost incurred to manufacture motors for household division and revenue lost Since it does not have excess capacity there would be loss of revenue   Thus Min Acceptable price =Variable Cost + Loss of Contribution Variable cost                   10.81 Loss of Revenue(34.55 - 10.81)                   23.74 Min Transfer Price                   34.55

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