Best Practices, Inc., is a management consulting firm. Its Corporate Division ad

Question

Best Practices, Inc., is a management consulting firm. Its Corporate Division advises private firms on the adoption and use of cost management systems. Government Division consults with state and local governments. Government Division has a client that is interested in implementing an activity-based costing system in its public works department. The division’s head approached the head of Corporate Division about using one of its associates. Corporate Division charges clients $630 per hour for associate services, the same rate other consulting companies charge. The Government Division head complained that it could hire its own associate at an estimated variable cost of $230 per hour, which is what Corporate pays its associates.

Required:

a. What is the minimum transfer price that Corporate Division should obtain for its services, assuming that it is operating at capacity?

b. What is the maximum price that Government Division should pay?

c-1. Is there any change in minimum transfer price as referred in part a, if Corporate Division had idle capacity? Yes or No?

c-2. Is there any change in maximum transfer price as referred in part b, if Corporate Division had idle capacity? Yes or No?

Explanation / Answer

a Minimum Transfer Price = $630 b Maximum Transfer Price = $230 c1 Yes, minimum transfer price will be $230 c2 No

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