Question

The Heating Division of Kobe International produces a heating element that it sells to its customers for $42 per unit. Its variable cost per unit is $21, and its fixed cost per unit is $9. Top management of Kobe International would like the Heating Division to transfer 14,500 heating units to another division within the company at a price of $30. Assume that the Heating Division has sufficient excess capacity to provide the 14,500 heating units to the other division. What is the minimum transfer price that the Heating Division should accept

Answer 1

$21

Step-by-step explanation:

The computation of the minimum transfer price that should be accepted is shown below:

here the minimum transfer price should be equivalent to the variable cost per unit i.e. $21

Because the fixed cost is irrelevant in the given situation as it is remain fixed whether the production is increased or not

hence, the minimum transfer price is $21