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 $41 per unit. Variable costs for the casing are $28 per unit and fixed cost is $6 per unit. Cotwold executives would like for the Molding Division to transfer 24,000 units to the Assembly Division at a price of $35 per unit.

Assume the Molding Division is operating at full capacity.

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

• Yes

• No

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

	Minimum Transfer Price

Answer 1

Part 1)

The correct answer is NO

Explaination

Since the division is operating at full capacity, the minimum transfer price would be external selling price, since the price is less than the external selling price, so the is should not accept the proposed transfer price.

Part 2)

The correct answer is

Minimum Transfer Price will be accepted by molding division will be $ 41 Per Unit

Explanation

Minimum transfer price = variable cost - loss of contribution margin from external sale

= 28 + (41-28)

= 28+13

= $ 41

So the correct answer Minimum transfer price = $ 41 Per Unit