The Windshield division of Fast Car Co. makes windshields for use in Fast Car’s

Question

The Windshield division of Fast Car Co. makes windshields for use in Fast Car’s Assembly division. The Windshield division incurs variable costs of $220 per windshield and has capacity to make 740,000 windshields per year. The market price is $485 per windshield. The Windshield division incurs total fixed costs of $3,600,000 per year.

Assume the Windshield division has excess capacity, what is the range of possible transfer prices that could be used on transfers between the Windshield and Assembly divisions?

Transfer price per windshield will be atleast __________________ but not more then _________

Explanation / Answer

Given that, Windshield division has excess capacity. Therefore, there will not be any concept of Opportunity cost. Hence, the minimum transefer price that should be charged will be Windshield division's Variable Cost per Windshield.i.e, $ 220 per Windsheild.

The maximum transfer price will be market price of the windshield. i.e., $ 485 per windshield.

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