Question

The Heating Division of Kobe International produces a heating element that it sells to its customers for $40 per unit. Its variable cost per unit is $28, and its fixed cost per unit is $28. Top management of Kobe International would like the Heating Division to transfer 14,700 heating units to another division within the company at a price of $35. The Heating Division is operating at full capacity. Assume that the units being requested are special high-performance units and that the division's variable cost would be $24 per unit (rather than $30). What is the minimum transfer price that the Heating Division should accept?

Minimum transfer price

Answer 1

The minimum transfer price that the Heating Division should accept is equal to its variable cost per unit. Since the Heating Division is operating at full capacity, any units transferred to another division within the company would result in lost sales to outside customers. Therefore, the minimum transfer price should be set to cover the variable cost of producing the units, so that the division does not incur a loss on the transferred units.

In this case, the variable cost per unit for the special high-performance units being requested is $24. Therefore, the minimum transfer price that the Heating Division should accept is $24 per unit.

Step-by-step explanation: