Flowers and Flowers, Inc., has two divisions. Division A has an investment base

Question

Flowers and Flowers, Inc., has two divisions. Division A has an investment base of $1,200,000 and produces (and sells) 168,000 units of Eyne at a market price of $21.00 per unit. Variable costs total $6.30 per unit, and fixed charges are $6.50 per unit (based on a capacity of 208,000 units). Division B wants to purchase 47,000 units of Eyne from Division A. However, Division B is only willing to pay $13.65 per unit.

What is the minimum transfer price for the 47,000 unit order that Division A would accept if it wishes to maintain its pre-order contribution?

Explanation / Answer

If transfering division has excess capacity then for that excess capacity the division can tranfer at Variable cost.

So total capacity 208,000

Less:Outside demand (168,000)

Excess Capacity 40,000

So A division can transfer at minimum price 40,000 @$6.3

7,000 @$21(because opportuinity cost loosing)

so average =(4000*6.3+7000*21)/47000=$8.5

The minimum transfer price for the 47,000 order that divion can transfer @$8.5

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