Question

Question 4 The Bathtub Division of Kirk Plumbing Corporation has recently approached the Faucet Division with a proposal. The Bathtub Division would like to make a special "ivory" tub with gold-plated fixtures for the company's 50-year anniversary. It would make only 4,600 of these units. It would like the Faucet Division to make the fixtures and provide them to the Bathtub Division at a transfer price of $160. If sold externally, the estimated variable cost per unit would be $130. However, by selling internally, the Faucet Division would save $6 per unit on variable selling expenses. The Faucet Division is currently operating at full capacity. Its standard unit sells for $41 per unit and has variable costs of $33. Compute the minimum transfer price that the Faucet Division should be willing to accept. Minimum transfer price Should they accept this offer? They this offer.

Answer 1

Minimum transfer price = $130 + ($41 - $33 - $6) = $132

Minimum transfer price = $132

Since the minimum transfer price is less than $160 which is agreed transfer price, the offer should be accepted.

They should accept this offer.