The Molding Division of Cotwold Company manufactures a plastic casing used by th
ID: 2467183 • Letter: T
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 $29 per unit. Variable costs for the casing are $ 16 per unit and fixed cost is $4 per unit. Cotwold executives would like for the Molding Division to transfer 12,000 units to the Assembly Division at a price of $20 per unit. Assume that the Molding Division is operating at full capacity.
Required: 1. Should it accept the transfer price proposed by management? Yes No
Explanation / Answer
Solution:
1. No, the Molding Dept. should not accept a transfer price of $20 if operating at capacity. In order to accept the transfer, it would have to give up external sales of $29 per unit.Therefore, a transfer price of $20 would decrease Molding’s segment margin by $9 per unit.
2. The minimum price Molding would accept is $29 because the company is operating at full capacity and that is the amount for which it can sell the plastic casings in the openmarket