Question

The Heating Division of Kobe International produces a heating element that it sells to its customers for $39 per unit. Its variable cost per unit is $21, and its fixed cost per unit is $7. Top management of Kobe International would like the Heating Division to transfer 14,900 heating units to another division within the company at a price of $32. The Heating Division is operating at full capacity. What is the minimum transfer price that the Heating Division should accept

Answer 1

The minimum transfer price for the Heating Division should be at least the contribution margin of $18 per unit, to cover the opportunity cost of not selling the units externally.

Step-by-step explanation:

The minimum transfer price for the Heating Division of Kobe International should be set based on the opportunity cost of transferring the units internally rather than selling them externally at the market price. Since the Heating Division is operating at full capacity, the opportunity cost is the contribution margin it would earn on sales made externally. This contribution margin is calculated as the selling price minus the variable cost, which is $39 - $21 = $18 per unit. Considering this, the minimum transfer price that the Heating Division should accept for transferring 14,900 heating units internally should be at least $18 per unit, to cover the lost contribution margin on external sales.

Answer 2

$21

Step-by-step explanation:

The computation of the minimum transfer price is shown below

Here the minimum transfer price should be equivalent to the marginal price i.e. variable cost and the fixed cost would not considered as it remains fixed

So according to the given situation, the minimum transfer price that the heating division should accept is $21

The same would be considered and relevant