Dockside Enterprises, Inc., operates two divisions: (1) a management division th

Question

Dockside Enterprises, Inc., operates two divisions: (1) a management division that owns and manages bulk carriers on the Great Lakes and (2) a repair division that operates a dry dock in Tampa, Florida. The repair division works on company ships, as well as other large-hull ships. The repair division has an estimated variable cost of $34 per labor-hour. The repair division has a backlog of work for outside ships. They charge $76 per hour for labor, which is standard for this type of work. The management division complained that it could hire its own repair workers for $44 per hour, including leasing an adequate work area.

What is the minimum transfer price per hour that the repair division should obtain for its services, assuming it is operating at capacity?

$42.

$34.

$44.

$76.

Explanation / Answer

As we know Repair division is operating at capacity. So if it gives services to management division then it need to loose work from outsider. So it should charge the $76 from management division.

$76 is the minimum transfer price per hour that the repair division should obtain for its services.

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