Question

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 4.500 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 $40 per unit and has variable costs of $25. 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

ANSWER:

Minimum transfer price = variable cost + profit lost

= ($130 - $6) + ($40 - $25)

= $139

Yes, they should accept this offer as price offered $160 is higher than minimum transfer price $139