Question

he Molding Division of Cotwold Company manufactures a plastic casing used by the Assembly Division. This casing is also sold to external customers for $40 per unit. Variable costs for the casing are $27 per unit and fixed cost is $6 per unit. Cotwold executives would like for the Molding Division to transfer 23,000 units to the Assembly Division at a price of $34 per unit.

Assume the Molding Division is operating at full capacity.

Required:
1. Should it accept the transfer price proposed by management?

• Yes

• No

2. Identify the minimum transfer price that the Molding Division will accept.

Answer 1

The answer has been presented in the supporting sheet. All the parts has been solved with detailed explanation and format. For detailed answer refer to the supporting sheet.

1 Answer 2 3 Part 1) No, it should not accept the transfer price proposed by management, as it will lead to loss to molding division. As molding diviision is operating at fulll capacity, it should not transfer (any unit less than the variable cost+ contribution loss per unit) to assembly division 4 So the correct answer is No 6 7 8 Part 2) 9 The minimum price molding division will accept 10variable cost contribution loss 11 27+(40-27) =' 12 $40 13