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 uni 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? Calculate the effect on Molding Division's net income if it accepts the $25 transfer price.

Explanation / Answer

1)Since there is enough capacity to produce units for assembly division so molding division accept the transfer price of $ 25 as there will be profit of $ 4 per unit     (25 -21 )  

Fixed cost is irrelevant as it will be incurred whether offer is accepted or not .

2)Net income will increase by 4 * 17000 = $ 68000

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