Question

Dockside Enterprises Incorporated operates two divisions: (1) a management division that owns and manages bulk carriers on the Great Lakes and (2) a repair division that operates a dry dock in Tampa, Florida. The repair division works on company ships and outside large-hull ships. The repair division has an estimated variable cost of $37 per labor-hour, has a backlog of work for outside ships, and charges $77 per hour for labor, which is standard for this type of work. The management division complained that it could hire its own repair workers for $47 per hour, including leasing an adequate work area. What is the minimum transfer price per hour that the repair division should obtain for its services, assuming it is operating at capacity

Answer 1

Dockside Enterprises

The minimum transfer price per hour that the repair division should obtain for its services, assuming it is operating at capacity is:

= $47.

Step-by-step explanation:

Repair division's estimated variable cost per labor-hour = $37

Standard selling price per labor-hour = $77

Labor cost of the hire of outside repair workers per hour = $47

Minimum transfer price = the variable costs plus a calculated opportunity cost

Minimum transfer price = $47 ($37 + $10)

Calculated opportunity cost = $10 ($47 - $37)