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. Fixed cost per unit $5.38 Variable cost per unit $11.32 Selling price per unit $34.32 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.) Minimum transfer price $ per unit LINK TO TEXT 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.) Minimum transfer price $

Explanation / Answer

The contribution per unit of motor is $23. If there is an excess capacity in the division, the fixed cost will not change per unit and hence it is irrelevant. In such a case, the minimum amount that should be realised for transfer to Household division will be the Variable cost of manufacture. That is $11.32. Since the capacity is excess, it means, the demand for the product in the market is less than the capacity available. There is no option for the division to produce more units and sell it in the market and hence there is no relevance for contribution per unit. The household division can get the product at a lesser cost and et more profit out of it which will in turn increase the profit of the company as a whole.

If the capacity is full, then the effect of contribution foregone should be considered. If the motors are transfered to Household division, the contribution that would have obtained had it been sold outside needs to be considered. In such case, the ideal price at which it is to be transfered is the market pricce. That is $34.32

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