Cruises, Inc., operates two divisions: (1) a management division that owns and m

Question

Cruises, Inc., operates two divisions: (1) a management division that owns and manages cruise ships in the Florida Keys and (2) a repair division that operates a dry dock in Marble Sand Florida. The repair division works on company ships, as well as other large-hull ships. The repair division has an estimated variable cost of $30.50 per labor-hour. The repair division has a backlog of work for outside ships. They charge $52.00 per hour for labor, which is standard for this type of work. The management division complained that it could hire its own repair workers for $32.00 per hour, including leasing an adequate work area. What is the maximum transfer price per hour that the management division should pay?

Explanation / Answer

As the management division can repair its own work for $32 per hour. Thus, the maximum transfer price that the management should pay is the price at which repair work can be done by hiring its own repair work.

Thus, the transfer price is $32 per hour.

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