E8-14 The Bathtub Division of Kirk Plumbing Corporation has recently approached

Question

E8-14 The Bathtub Division of Kirk Plumbing Corporation has recently approached the Faucet Division with a proposal. The Bathtub Division would like to make a special "ivory" tub with gold-plated fixtures for the company's 50-year anniversary. It would make only 5,000 of these units. It would like the Faucet Division to make the fixtures and provide them to the Bathtub Division at a transfer price of $160. If sold externally, the estimated variable cost per unit would be $140. However, by selling internally, the Faucet Division would save $6 per unit on variable selling expenses. The Faucet Division is currently oper ating at full capacity. Its standard unit sells for $50 per unit and has variable costs of $29 ansfer Instructions Compute the minimum transfer price that the Faucet Division should be willing to accept, and discuss whether it should accept this offer

Explanation / Answer

1) Compute the minimum transfer price that the Faucet division should be willing to accept ?

Solution: $155

Working: 140 + (50-29-6) = $155

2) Discuss whether it should accept this offer

Solution: Yes, they should accept this offer, as the minimum transfer price is lesser than $160

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