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 $22, and its fixed cost per unit is $5. Top management of Kobe International would like the Heating Division to transfer 14,800 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 14,800 heating units to the other division. What is the minimum transfer price that the Heating Division should accept? Minimum transfer price 38

Explanation / Answer

Ans) Minimum trasfer price = $22

Reason:

When there is excess capacity to produce the internal trasfer units the trasfer price should be atlease equel to its "Variable cost" to avoid losses by the division.

If there is no excess capacity to produce then the trasfer price should be the "Selling prie to outsiders" to recover the oppurtunity cost.

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