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 $37 per unit. Variable costs for the casing are $ 24 per unit and fixed cost is $5 per unit. Cotwold executives would like for the Molding Division to transfer 20,000 units to the Assembly Division at a price of $31 per unit.

Assume that the Molding Division is operating at full capacity.

1. Should it accept the transfer price proposed by management?

Yes or No

  

2. Identify the minimum transfer price that the Molding Division will accept.
Minimum Price:

Explanation / Answer

Answer

If Molding Division Transfer 20000 units to Assembly division at $31 , it will not be able to sell 20000 units to outside market at $37. Hence, Molding Division will be at loss.

Therefore, Molding Division should not accept the Transfer Price proposed by management.

The minimum transfer price would the variable cost per unit + contribution lost per unit.

Variable cost = $24 per unit.
When 20000 units are not sold to outside but are transferred, the contribution margin that would have been earned per unit would have been $13 per unit [$37 - $24]

Hence, total minimum transfer price that Molding Division will accept will be $24 + $13 = $37 per unit only.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.