Question

The Molding Division of Cotwold Company manufactures a plastic casing used by the Assembly Division. This casing is also sold to external customers for $29 per unit. Variable costs for the casing are $16 per unit and fixed cost is $4 per unit. Cotwold executives would like for the Molding Division to transfer 12,000 units to the Assembly Division at a price of $20 per unit. Assume that the Molding Division has enough excess capacity to accommodate the request.   


Required:
1. Should the Molding Division accept the $20 transfer price proposed by management?

    

	No
	Yes

  

2. Calculate the effect on Molding Division’s net income if it accepts the $20 transfer price.

Answer 1

As per the Transfer pricing general rule, the minimum transfer price in the case of sufficient capacity is available should be equal to th the variable manufacturing cost incurred on the goods sold to the other Division of the Company. And the minimum transfer price if sufficient capacity is not available should be equal to the Selling price to the outside customer after deducting the saving in shipping cost .

1. 

Yes, Molding Division should accept the $20 transfer price proposed by management because $20 is higher than the Variable costs per unit of $16.

2. Molding Division’s net income will increase by = (Transfer price per unit - variable costs per unit) x no. of units

= ($20 - $16) x 12,000 units

= $48,000