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 $43 per unit. Its variable cost per unit is $20, and its fixed cost per unit is $5. Top management of Kobe International would like the Heating Division to transfer 14,600 heating units to another division within the company at a price of $32. Assume that the Heating Division has sufficient excess capacity to provide the 14,600 heating units to the other division. What is the minimum transfer price that the Heating Division should accept?

Explanation / Answer

Solution-

Since the Heating Division has sufficient excess capacity it can agree on minimum on variable cost as fixed cost is already being charged to the external customer and its a sunk cost.

Variable Cost=$20*14,600

=$292,000

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