Best Practices, Inc., is a management consulting firm. Its Corporate Division ad

Question

Best Practices, Inc., is a management consulting firm. Its Corporate Division advises private firms on the adoption and use of cost management systems. Government Division consults with state and local governments. Government Division has a client that is interested in implementing an activity-based costing system in its public works department. The division's head approached the head of Corporate Division about using one of its associates. Corporate Division charges clients $450 per hour for associate services, the same rate other consulting companies charge. The Government Division head complained that it could hire its own associate at an estimated variable cost of $150 per hour, which is what Corporate pays its associates.

Required (Please show work) :
A) What is the minimum transfer price that Corporate Division should obtain for its services, assuming that it is operating at capacity? Transfer Price $_____ per hr.

(b) What is the maximum price that Government Division should pay? Maximum Price $___ per hr.

(c) Is there any change in minimum transfer price as referred in part (a), if Corporate Division had idle capacity? Yes or No?

Explanation / Answer

(a) the minimum transfer price that Corporate Division should obtain for its services = $450 per hour the market price for these services

(b) the maximum price that Government Division should pay = $150 per hour the cost of the best alternative

(c) if Corporate Division had idle capacity part (a) would be = $150 per hour and (b) would not be effected

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