Brief Exercise 8-7 The Heating Division of Kobe International produces a heating element that it sells to its customers for $44 per unit. Its variable cost per unit is $25, and its fixed cost per unit is $12. Top management of Kobe International would like the Heating Division to transfer 14,600 heating units to another division within the company at a price of $30. The Heating Division is operating at full capacity. What is the minimum transfer price that the Heating Division should accept?

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Business

Davis

9 July, 19:59

Brief Exercise 8-7 The Heating Division of Kobe International produces a heating element that it sells to its customers for $44 per unit. Its variable cost per unit is $25, and its fixed cost per unit is $12. Top management of Kobe International would like the Heating Division to transfer 14,600 heating units to another division within the company at a price of $30. The Heating Division is operating at full capacity. What is the minimum transfer price that the Heating Division should accept?

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Answers (1)

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Sophie Chapman · Answer 1

Transfer price = $37

Explanation:

Giving the following information:

Its variable cost per unit is $25, and its fixed cost per unit is $12. Top management of Kobe International would like the Heating Division to transfer 14,600 heating units to another division within the company for $30.

If the Heating division is not operating ar full capacity, the fixed costs shouldn't be taken into account. In this case, the Heating Division is operating at full capacity. The minimum transfer price must include both fixed and variable costs.

Transfer price = fixed costs + variable cost

Transfer price = 12 + 25 = $37