Question

The Heating Division of Kobe International produces a heating element that it sells to its customers for $47 per unit. Its variable cost per unit is $30, and its fixed cost per unit is $8. Top management of Kobe International would like the Heating Division to transfer 14,700 heating units to another division within the company at a price of $35. The Heating Division is operating at full capacity. Assume that the units being requested are special high-performance units and that the division's variable cost would be $24 per unit (rather than $30). What is the minimum transfer price that the Heating Division should accept?

Minimum transfer price

Answer 1

As Heating Division is operating at full capacity, Minimum transfer price would be variable cost plus Contribution margin lost per unit.
Variable cost per unit	24
Contribution margin lost per unit	17	=47-30
Minimum transfer price	41