Question

The Molding Division of Cotwold Company manufactures a plastic casing used by the Assembly Division. This casing is also sold to external customers for $25 per unit. Variable costs for the casing are $12 per unit and fixed cost is $3 per unit Cotwold executives would like for the Molding Division to transfer 8,000 units to the Assembly Division at a price of $18 per unit. Assume that the Molding Division has excess capacity, but the Assembly Division requires the casing to be made from a specific blend of plastics. This would raise the variable cost per unit to $20. Required: 1. Should the Molding Division accept the $18 transfer price proposed by management? 2. Determine the minimum transfer price that it will accept. 3. Determine the mutually beneficial transfer price so that the two divisions equally split the profits from the transfer. Answer is complete but not entirely correct. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Determine the mutually beneficial transfer price so that the two divisions equally split the profits from the transfer. (Round your answer to 2 decimal places.) Mutually Beneficial Transfer Price S 2650 %

Answer 1

1.No, as it is less than the variable cost per unit

2.Since there is spare capacity, no additional fixed cost will be incurred on transferred units

Hence, minimum transfer price = Variable cost

i.e. $20 per unit

3.Benefit from transfer = $25-$20 = $5

Hence, Mutually beneficial transfer price = $20 + 5/2 = $22.5