Cohasset Company currently manufactures all component parts used in the manufact

Question

Cohasset Company currently manufactures all component parts used in the manufacture of various hand tools. Hurley Division produces a steel handle used in three different tools. The budget for these handles is 120,000 units with the following unit cost.

    

        

Ironwood Division purchases 32,000 handles from Hurley Division and completes the hand tools. An outside supplier, R & M Steel, has offered to supply 32,000 units of the handle to Ironwood Division for $1.85 per unit. Hurley currently has idle capacity that cannot be used.

If Cohasset would like to develop a range of transfer prices, what would be the minimum transfer price that Hurley would be willing to accept?

  Direct material $ 1.20   Direct labor 1.00   Variable overhead 0.70   Fixed overhead 0.40   Total unit cost $ 3.30

Explanation / Answer

As Hurley has idle capacity and no opportunity cost to sale outside at higher price, the minimum acceptable transfer price for Hurely Division will be the Marginal cost or variable cost per unit of Production.

Variable cost per unit of production by Hurley division is $2.90.

So Minimum transfer price acceptable to Hurley is $2.90 per unit.

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---