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 $38 per unit. Its variable cost per unit is $30, and its fixed cost per unit is $7. Top management of Kobe International would like the Heating Division to transfer 15,200 heating units to another division within the company at a price of $34. The Heating Division is operating at full capacity. Assume that the units being requested are special high-performance units and that the division's variable cost would be $28 per unit (rather than $30). What is the minimum transfer price that the Heating Division should accept?

Explanation / Answer

Answer: Minimum transfer Price=variable cost+contribution per unit

=$28+(38-30-7)

=$29

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