Question

"The Heating Division of Kobe International produces a heating element that it sells to its customers for $45 per unit. Its variable cost per unit is $30, and its fixed cost per unit is $11. 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 $33. Assume that the Heating Division has sufficient excess capacity to provide the 14,900 heating units to the other division. What is the minimum transfer price that the Heating Division should accept

Answer 1

Answer: $30

Step-by-step explanation:

The formula to determine the transfer price is;

Transfer price = Differential cost to selling division + Opportunity cost of selling internally

The Differential cost is the Variable cost of producing the heating units so is $30.

The Opportunity cost of selling internally refers to if any sales will be foregone outside by selling inside. As the Heating Division has sufficient excess capacity, outside sales will not be affected so this cost is $0.

Transfer Price = 30 + 0

= $30