Riverbed Corporation makes power tools. The Power division makes a battery that

Question

Riverbed Corporation makes power tools. The Power division makes a battery that the Small Tools division needs for a new product. The Power division’s variable cost of manufacturing the component is $4 per unit. The component is also available on the open market at a price of $12 per unit. The Small Tools division needs 59,300 motors per year. If the Power division has adequate excess capacity to supply the 49,300 motors, what is the minimum transfer price? If the Power division has adequate excess capacity to supply the 49,300 motors, what is the range of prices that is likely to be acceptable to both the Power division and the Small Tools division? Riverbed Corporation makes power tools. The Power division makes a battery that the Small Tools division needs for a new product. The Power division’s variable cost of manufacturing the component is $4 per unit. The component is also available on the open market at a price of $12 per unit. The Small Tools division needs 59,300 motors per year. If the Power division has adequate excess capacity to supply the 49,300 motors, what is the minimum transfer price? If the Power division has adequate excess capacity to supply the 49,300 motors, what is the range of prices that is likely to be acceptable to both the Power division and the Small Tools division?

Explanation / Answer

If the Power division has adequate excess capacity to supply the 49,300 motors, the minimum transfer price is the variable cost of manufacturing the component which is $ 4 per unit (avoidable cost)

Minimuum transfer price = $4.

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If the Power division has adequate excess capacity to supply the 49,300 motors, the range of prices that is likely to be acceptable to both the Power division and the Small Tools division is the variable cost of manufacturing the component which is $4 per unit and the market price of $ 12 per unit.

Range of prices = $4 and $12.

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