The Molding Division of Cotwold Company manufactures a plastic casing used by th

Question

The Molding Division of Cotwold Company manufactures a plastic casing used by the Assembly Division. This casing is also sold to external customers for $29 per unit. Variable costs for the casing are $ 16 per unit and fixed cost is $4 per unit. Cotwold executives would like for the Molding Division to transfer 12,000 units to the Assembly Division at a price of $20 per unit. Assume that the Molding Division is operating at full capacity.

  

  

Required: 1. Should it accept the transfer price proposed by management? Yes No

Explanation / Answer

1.No,As per below table it should not accept proposal

Minimum transfer price-

Molding Division is operating at full capacity so it would transfer at same as outside customers-

$29

External Assembly customer Dept. Selling Price 29 20 Variable cost 16 16 Contribution 13 4 Fixed Cost 4 4 Profit 9 0

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