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 $25 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 8,000 units to the Assembly Division at a price of $18 per unit. Assume that the Molding Division has enough excess capacity to accommodate the request. Required: 1. Should the Molding Division accept the $18 transfer price proposed by management? No Yes 2. Calculate the effect on Molding Division’s net income if it accepts the $18 transfer price.

Net Income:

Answer 1

1.  No, the Molding Division should not accept a transfer price of $18 if operating at capacity. In order to accept the transfer, it would have to give up external sales of $25 per unit. Therefore, a transfer price of $18 would decrease Molding's segment margin by $7 per unit.

2. The minimum price Molding would accept is $25 because the company is operating at full capacity and that is the amount for which it can sell the plastic casings in the open market.