Question

Chen Company's Small Motor Division manufactures a number of small motors used in household and office appliances. The Household Division of Chen then assembles and packages such items as blenders and juicers. Both divisions are free to buy and sell any of their components internally or externally. The following costs relate to small motor LN233 on a per unit basis.

Fixed cost per unit		$4.65
Variable cost per unit		$11.20
Selling price per unit		$35.10

a.) Assuming that the Small Motor Division has excess capacity, compute the minimum acceptable price for the transfer of small motor LN233 to the Household Division. (Round answer to 2 decimal places, e.g. 10.50.)

What is the minimum transfer price (per unit)?

b.) Assuming that the Small Motor Division does not have excess capacity, compute the minimum acceptable price for the transfer of the small motor to the Household Division. (Round answer to 2 decimal places, e.g. 10.50.)

What is the minimum transfer price (per unit)?

Answer 1

a.) Minimum transfer price in case of excess capacity = variable cost per unit (Opportunity cost will not be taken into account as there is a surplus capacity)

Minimum transfer price = $ 11.20 (per unit)

If the Small Motor Division has excess capacity minimum acceptable price for the transfer of small motor LN233 to the Household Division will be the variable cost per unit.

As the company has excess capacity and it will not incurr any addtional fixed cost and also there will be no opportunity cost so that the minimum price will be variable cost.

b.) Minimum transfer price if there is no excess capacity = variable cost per unit + Opportunity lost per unit = Selling price of the product

Minimum transfer price if there is no excess capacity = $ 35.10 ($ 11.20 + $ 23.90)

If the Small Motor Division does not have excess capacity minimum acceptable price for the transfer of small motor LN233 to the Household Division will be the swelling price per unit.

Please do upvote if you found the answer useful.
Feel free to reach in the comment section in case of any clarification or queries.