Share
Explore BrainMass

Minimum Price & Transfer Price Questions

Allied Company's Small Motor Division manufactures a number of small motors used in household and office appliances. The Household Division of Allied then assembles and packages such items as blenders and juicers. Both divisions are free to buy and sell any of their components internally or externally. The following costs relate to small
motor LN233 on a per unit basis.

Fixed cost per unit $ 5
Variable cost per unit 8
Selling price per unit 30

Instructions
(a) Assuming that the Small Motor Division has excess capacity, compute the minimum acceptable price for the transfer of small motor LN233 to the Household Division.
(b) Assuming that the Small Motor Division does not have excess capacity, compute the minimum acceptable price for the transfer of the small motor to the Household Division.
(c) Explain why the level of capacity in the Small Motor Division has an effect on the transfer price

Solution Preview

Hi,
Please see the response to your posting as below:

(a) As small Motor Division has excess capacity, the minimum acceptable price for the transfer of small motor LN233 to the Household Division will be the variable cost per unit i.e. $8 per units

(b) If the Small Motor Division ...

Solution Summary

Computations of the minimum acceptable price for the transfer of small motor LN233 to the Household at different situation are given in the solution. Worded explanations and calculations included.

$2.19