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. $5.43 Fixed cost per unit Variable cost per unit $ 10.55 Selling price per unit 35.23

Answer 1

Requirement-1: If the Small Motor Division has excess capacity, Minimum transfer price Variable cost +Opportunity cost. That is, Variable cost per unit Opportunity cost per unit.00[Because the company has sufficient excess capacity] Minimum transfer price$10.55 $10.55+ $0.oo] $10.55 If the Small Motor Division has excess capacity, Minimum transfer price Variable cost+Opportunity cost. That is, Variable cost per unit Opportunity cost per unit 24.68[As the company has no excess capacity, Contribution lost is the opportunity cost] Minimum transfer price35.23 IS10.55+$24.68 NOTE: Contribution lost Selling price per unit- Variable cost per unit $35.23- $10.55 $24.68. $10.55 Requirement-3 If a division has no excess capacity, it can obtain the selling price per unit in an outside market rather than getting lower price per unit by selling its product to another division. At the same time, if a division has excess capacity, as longer as it receives at least the variable cost per unit, this division will end up with net gain. Therefore, the level of capacity playsa significant role in determining the appropriate transfer price.