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The Molding Division of Cotwold Company manufactures a plastic casing used by the Assembly Division. This casing is also sold to external customers for $39 per unit. Variable costs for the casing are $12 per unit and fixed cost is $6 per unit. Cotwold executives would like for the Molding Division to transfer 22,000 units to the Assembly Division at a price of $33 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 $37.

Sagot :

Answer:

1. No, the Molding Division accept the $33 transfer price proposed by management.

2. The minimum transfer price that the Molding Division will accept is $37.

3. Mutually beneficial transfer price = $38.00

Explanation:

Note: This question is not complete as the requirements are missing. The requirements are therefore provided to complete the question before answering it as follows:

Required:

1. Should the Molding Division accept the $33 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. (Round your answer to 2 decimal places.)

The explanation of the answers is now provided as follows:

Note: Since it is assumed that the Molding Division has excess capacity, the relevant cost to consider whether or not to accept is the variable cost per unit. The fixed cost per unit is not relevant as it will be incurred whether or not the transfer is accepted.

We can now proceed as follows:

1. Should the Molding Division accept the $33 transfer price proposed by management?

No, the Molding Division accept the $33 transfer price proposed by management. This is because it is lower than the variable cost per unit of $37 for casing from a specific blend of plastics required by the Assembly Division.

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

The minimum transfer price that the Molding Division will accept is $37. This is equal to the variable cost per unit of $37 for casing from a specific blend of plastics required by the Assembly Division.

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.)

This can be determined as follows:

Profit per unit from selling to external customers = Selling price per unit to external customers - Variable cost per unit for casing from a specific blend of plastics required by the Assembly Division = $39 - $37 = $2.00

Mutually beneficial transfer price = Variable cost per unit for casing from a specific blend of plastics required by the Assembly Division + (Profit per unit from selling to external customers / 2) = $37 + ($2 / 2) = $38.00

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