Exercise M-11 Chen Company\'s Small Motor Division manufactures a number of smal

Question

Exercise M-11 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 Variable cost per unit Selling price per unit $5.38 $11.25 $35.51 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 Assuming that the Sal 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 Click if you would like to Show Work for this question: Open Show Work

Explanation / Answer

a. Minimum transfer price when there is excess capacity:

Minimum transfer price = Variable Cost + Opportunity Cost = $ 11.25 + $ 0. ( There is no opportunity cost because Small Motors Division has excess capacity).

b. Minimum transfer price when there is no excess capacity :

Minimum transfer price = Variable Cost + Opportunity Cost* = $ 11.25 + $ ( 35.51 - 11.25) = $ 35.51 per unit

Opportunity cost = Lost Contribution Margin = $ 35.51 - $ 11.25 = $ 24.26.

Minimum Transfer Price $ 11.25 per unit

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