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 $43 per unit. Its variable cost per unit is $20, and its fixed cost per unit is $10. Top management of KLM International would like the Heating Division to transfer 14,530 heating units to another division within the company at a price of $26. The Heating Division is operating at full capacity. Assume that the units being requested are special high-performance units, and that the division's variable cost would be $24 per unit. What is the minimum transfer price that the Heating Division should accept?

Explanation / Answer

Minimum
transfer price = Additional incremental costs per unit incurred up to the point of transfer + Opportunity costs
per unit to

INCREMENTAL COST = VARIABLE COST=$24

OPPORTUNITY COST= (Selling price – Outlay costs per unit)

=(43-(20+10))=$13

MINIMUM TRANSFER PRICE = $24+$13=$37

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