Question

Dockside Enterprises Incorporated operates two divisions: (1) a management division that owns and manages bulk carriers on the Great Lakes and (2) a repair division that operates a dry dock in Tampa, Florida. The repair division works on company ships and outside large-hull ships. The repair division has an estimated variable cost of $47 per labor-hour, has a backlog of work for outside ships, and charges $87 per hour for labor, which is standard for this type of work. The management division complained that it could hire its own repair workers for $57 per hour, including leasing an adequate work area. If the repair division had idle capacity, what is the minimum transfer price that the repair division should obtain? Multiple Choice Oo oo

Answer 1

Answer: $47

This is because repair division has idle capacity which can be devoted to the management division, who can hire from outside at $57. The estimated variable cost is $47, which would be the minimum price for repair division as transfer price. The range of the transfer price would be Maximum $57 and Minimum $47. Other fixed costs are immaterial as has to be incurred whatever be the production.