Question

The Molding Division of Cotwold Company manufactures a plastic casing used by the Assembly Division. This casing is also sold to external customers for $43 per unit. Variable costs for the casing are $12 per unit and fixed cost is $6 per unit. Cotwold executives would like for the Molding Division to transfer 26,000 units to the Assembly Division at a price of $37 per unit. Assume that the Molding Department has excess capacity, but the Assembly Department requires the casing to be made from a specific blend of plastics. This would raise the variable cost per unit to $41.

Should the Molding Division accept the $37 transfer price proposed by management?
a. Yes
b. No

Answer 1

The Molding Division should not accept the $37 transfer price for the casing, as the increased variable costs of $41 per unit would result in a loss for each unit transferred.

Step-by-step explanation:

The question at hand asks whether the Molding Division should accept a transfer price of $37 per unit from the Assembly Division, given the increased variable costs. After the specific blend of plastics is used for the casing required by the Assembly Division, the variable costs will increase to $41 per unit, which is higher than the proposed transfer price of $37 per unit. Therefore, since the transfer price does not cover the increased variable costs, the Molding Division should not accept the $37 transfer price proposed by management.