The Heating Division of Kobe International produces a heating element that it sells to its customers for $45 per unit. Its variable cost per unit is $25, and its fixed cost per unit is $10. Top management of Kobe International would like the Heating Division to transfer 15,000 heating units to another division within the company at a price of $29. Assume that the Heating Division has sufficient excess capacity to provide the 15,000 heating units to the other division. What is the minimum transfer price that the Heating Division should accept?

Question

Business

Marley Mullen

23 September, 18:48

The Heating Division of Kobe International produces a heating element that it sells to its customers for $45 per unit. Its variable cost per unit is $25, and its fixed cost per unit is $10. Top management of Kobe International would like the Heating Division to transfer 15,000 heating units to another division within the company at a price of $29. Assume that the Heating Division has sufficient excess capacity to provide the 15,000 heating units to the other division. What is the minimum transfer price that the Heating Division should accept?

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Answers (1)

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Coby Chaney · Answer 1

transfer cost $25

Explanation:

The minimum transfer price is equal to the marginal price.

The marginal price, in this case, will be the variable cost, because there is no additional fixed cost related to the transfer:

This should be analyzed like a special order request, only the variable cos matter unless we incur in additional fixed cost.

Marginal Cost = Variable cost: 25