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 $28 per unit. Variable costs for the casing are $12 per unit and fixed cost is $3 per unit. Cotwold executives would like for the Molding Division to transfer 11,000 units to the Assembly Division at a price of $22 per unit. Assume that the Molding Division has excess capacity, but the Assembly Division requires the casing to be made from a specific blend of plastics. This would raise the variable cost per unit to $23.

Required:
1. Should the Molding Division accept the $22 transfer price proposed by management?
2. Determine the minimum transfer price that it will accept.
3. Determine the mutually beneficial transfer price so that the two divisions equally split the profits from the transfer.

Should the Molding Division accept the $22 transfer price proposed by management?

	Yesradio button unchecked1 of 2 Noradio button unchecked2 of 2

• Required 2
• Determine the minimum transfer price that it will accept.

Minimum Transfer Price

• Required 3

Determine the mutually beneficial transfer price so that the two divisions equally split the profits from the transfer. (Round your answer to 2 decimal places.)

	Mutually Beneficial Transfer Price

Answer 1

Answer 1:

The Moulding department should NOT accept the transfer price.

This is because the variable cost is $ 23 and the division will incur losses if the transfer is done.

Answer 2:

Minimum transfer price = $ 23.

The minimum transfer price will be the variable cost the Moulding department has to incur, i.e. $ 23.

Answer 3:

The mutual transfer price is $ 25.50.

The minimum transfer price is $ 23.

The maximum transfer price is the selling price of the Casing in the market i.e. $ 28.

The average transfer price will be [$ 23 + $ 28] / 2 = $ 25.50.

In case of any doubt or clarification, feel free to come back via comments.