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 $27 per unit. Variable costs for the casing are $14 per unit and fixed cost is $3 per unit. Cotwold executives would like for the Molding Division to transfer 10,000 units to the Assembly Division at a price of $19 per unit. Assume the Molding Division is operating at full capacity. Required: 1. Should it accept the transfer price proposed by management

Answer 1

Cotwold Company

The Molding Division

The Molding Division should not accept the transfer price proposed by management. It is not reasonable and fair according to the rules for transfer pricing. However, the amount is above the marginal cost for the Molding Division.

Therefore, the division should exhaust opportunities for renegotiation of the transfer price. However, ultimately, management's decision will prevail.

Step-by-step explanation:

a) Data and Calculations:

Price of casing to external customers = $27 per unit

Variable costs for the casing = $14 per unit

Fixed cost for the casing = $3 per unit

Quantity to the Assembly Division = 10,000

Agreed transfer price = $19