Question

Conglomerate Co. has two divisions. Division A manufactures widgets while Division B manufactures woblets. In the production of widgets, one of the key components is a woblet and, hence, Division A could source its woblets temporarily directly from Division B rather than going to the external market. The following data pertains to woblets:

              Sales price $60.00 per woblet
Direct materials 22.00
Direct labor 10.00
Variable overhead 6.00
Allocated fixed costs      12.00

Division A has asked Division B to supply 4,000 woblets. Currently, Division B has the capacity to make 10,000 woblets annually.

If Division B is currently producing 5,000 woblets, what is the minimum transfer price per custom woblet that would permit Division B to maintain profit at current levels?

Answer 1

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Minimum Transfer Price:
Direct materials		$              22
Direct labor		$              10
Variable overhead		$                6
Minimum Transfer Price		$              38