The Heating Division of KLM International produces a heating element that it sel

Question

The Heating Division of KLM International produces a heating element that it sells to its customers for $49 per unit. Its variable cost per unit is $20, and its fixed cost per unit is $12. Top management of KLM International would like the Heating Division to transfer 11,100 heating units to another division within the company at a price of $28. The Heating Division is operating at full capacity. What is the minimum transfer price that the Heating Division should accept? Minimum transfer price $

Explanation / Answer

Solution-

Contribution Margin = Selling Price - Variable Cost

Contribution Margin = $49 - $20

Contribution Margin = $29

Profit = Contribution Margin - Fixed Cost

Profit =$29 - $12

Profit = $17

External selling price = $20 +$29

External selling price = $49

So,

Minimum transfer price = $49

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