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Minimum transfer price, total costs, minimum transfer price

The Appraisal Department of Mega-Mortgage Bank performs appraisals of business properties for loans being considered by the bank and appraisals for home buyers that are financing their purchase through some other financial institution. The department charges $160 per home appraisal, and its variable costs are $126 per appraisal. Recently, Mega-Mortgage Bank has opened its own Home-Loan Department and wants the Appraisal Department to perform 1,200 appraisals on all Mega-Mortgage Bank-financed home loans. Bank management feels that the cost of these appraisals to the Home-Loan Department should be $150. The variable cost per appraisal to the Home-Loan Department would be $6 less than those performed for outside customers due to savings in administrative costs.

Instructions
(a) Determine the minimum transfer price, assuming the Appraisal Department has excess capacity.
(b) Determine the minimum transfer price, assuming the Appraisal Department has no
excess capacity.
(c) Assuming the Appraisal Department has no excess capacity, should ,management force the department to charge the Home-Loan Department only $150? Discuss.

d) Compute the total cost per unit.

(e) Compute the desired ROI per unit.

(f) Using absorption cost pricing, compute the markup percentage.

Solution Preview

ANSWERS

Instruction A
Minimum transfer price with excess capacity = $120 which is the variable cost to produce an additional unit less than administrative cost savings

Instruction B
Minimum transfer price with no excess capacity = $126 which is the variable cost to produce an ...

Solution Summary

The solution examines minimum transfer price and total costs for Mega-Mortgage Banks.

$2.19