Palli Company has a division that manufactures a component that sells for $63 and has variable costs of $12 and fixed costs of $21. Another division wants to purchase the component. What is the minimum transfer price if the division is operating at capacity?

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1 September, 04:26

Palli Company has a division that manufactures a component that sells for $63 and has variable costs of $12 and fixed costs of $21. Another division wants to purchase the component. What is the minimum transfer price if the division is operating at capacity?

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Kaitlin Mcclure · Answer 1

minimum transfer price $12

Explanation:

The minimum transfer price should be the cost to produce the additional units to transfer. AKA marginal cost

In this case, the division faces $12 of variable cost to produce a single unit.

As long as the units to transfer are within the relevant range of the current capacity the fixed cost are irrelevant for the transfer price as these are sunk cost (already incurred)