The Molding Division of Cotwold Company manufactures a plastic casing used by th

Question

The Molding Division of Cotwold Company manufactures a plastic casing used by the Assembly Division. This casing is also sold to external customers for $34 per unit. Variable costs for the casing are $21 per unit and fixed cost is $5 per unit. Cotwold executives would like for the Molding Division to transfer 17,000 units to the Assembly Division at a price of $25 per unit. Assume that the Molding Division has enough excess capacity to accommodate the request. Should the Molding Division accept the $25 transfer price proposed by management? Yes No Calculate the effect on Molding Division's net income if it accepts the $25 transfer price.

Explanation / Answer

Contribution per unit on transfer to molding division = 25-21 i.e 4 per unit

Increase in net income = 4*17000 i.e 68000

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