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. Required: 1. Should it accept the transfer price proposed by management? OYes O No 2. Identify the minimum transfer price that the Molding Division will accept Minimum Price

Explanation / Answer

It is mentioned in the question that Molding division is already working on its full capacity and is selling its entire product at $37 per unit.

Company wants Molding division to transfer 20,000 units to Assembly line at $31 per unit which is not possible as Molding division is already working on its full capacity and is selling all products at $37, so selling product at $31 is not financially viable.

So Molding division should NOT accept the proposal by the management

Minimum transfer price must not be LESS than $37 as at $37 they are already selling its entire stock.

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