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 $25, and its fixed cost per unit is $10. Top management of Kobe International would like the Heating Division to transfer 15,000 heating units to another division within the company at a price of $29. The Heating Division is operating at full capacity. What is the minimum transfer price that the Heating Division should accept

Answer 1

$45

Step-by-step explanation:

Note that the Heating Division is operating at full capacity. Therefore, satisfying the internal order will result in external orders of 15,000 heating units being forgone.

Minimum Transfer Price = Variable Costs - Internal Savings + Opportunity cost

Where,

Variable Costs = $25

Internal Savings = $0

Opportunity cost = $45 - $25 = $20

Therefore,

Minimum Transfer Price = $25 + $20

= $45

The minimum transfer price that the Heating Division should accept is $45.