Question

The Can Division of Waterway Industries manufactures and sells tin cans externally for $1.50 per can....

The Can Division of Waterway Industries manufactures and sells tin cans externally for $1.50 per can. Its unit variable costs and unit fixed costs are $0.24 and $0.13, respectively. The Packaging Division wants to purchase 50,000 cans at $0.37 a can. Selling internally will save $0.05 a can.

Assuming the Can Division has sufficient capacity, what is the minimum transfer price it should accept?

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Answer #1

Minimum Transfer Price = $0.19

Working

Minimum transfer price is equal to the maximum cost incurred by the transferee department. In above case the cost incurred by Can division is $0.24 and since 0.05 will be saved the total additional cost is 0.19 per unit which is also minimum transfer price.

Minimum transfer price do not have any profits for the transferee department.

Variable cost per unit $     0.24
Less: Cost saved on internal transfer per unit $     0.05
Minimum transfer price $     0.19
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