The Molding Division of Cotwold Company manufactures a plastic casing used by th

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 $26 per unit. Variable costs for the casing are $12 per unit and fixed cost is $3 per unit. Cotwold executives would like for the Molding Division to transfer 9,000 units to the Assembly Division at a price of $18 per unit. Assume that the Molding Department has excess capacity, but the Assembly Department requires the casing to be made from a specific blend of plastics. This would raise the variable cost per unit to $21. Required: 1. Should the Molding Division accept the $18 transfer price proposed by management? Yes No 2. Determine the minimum transfer price thet it willccect S21 ice 3. Determine the mutually beneficial transfer price so that the two divisions equaily split the profts from the transfer. (Round your answer to 2 decimal places.) utually Beneficial Transfer Price in

Explanation / Answer

1) No, Since the transfer price does not even cover the variable cost incurred by the Moulding division. It will result in a loss of $3 per unit if moulding division transfers at $18.

2) Minimum transfer price shall be the variable cost incurred.
Therefore the minimum transfer price shall be $21 per unit.

3) Since the moulding division has excess capacity, ther opportunity cost shall be nill. The fixed cost of $3 can be shared among both the divisions thereby making the transfer price as $21 + $1.5 = $22.5

In this case both the divisions shall be benefited.

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