Question

Altoona Corporation has two divisions, Hinges and Doors, which are both organized as profit centers. The Hinge Division produces and sells hinges to the Door Division and to outside customers. The Hinge Division has total costs of $33, $21 of which are variable. The Hinge Division is operating significantly below capacity and sells the hinges for $48. The Door Division has received an offer from an outsider vendor to supply all the hinges it needs (27,000 hinges) at a cost of $43. The manager of the Door Division is considering the offer but wants to approach the Hinge Division first. What is the minimum transfer price from the Hinge Division to the Door Division?

Answer 1

Minimum transfer price = $21

Step-by-step explanation:

Transfer price is the price at which goods are exchange between branches or divisions of the same group

Where a division is operating at the less than the existing capacity, to optimist the group profit, the minimum transfer price should be set as follows

Minimum transfer price = Variable cost

Note that the fixed of $12 per unit (i.e 33-21) is irrelevant for this purpose, whether or not Hinges produces, it will be incurred either way.

It is worthy of note that there is no opportunity cost associated with any transfer to the Doors division because Hinges is currently having excess capacity.

Therefore, any offering price equal to or above the variable cost of $21 would be acceptable and optimize the group profit.

Hence, the minimum transfer price = $21