Company has a division that manufactures a component that sells for and has variable costs of and fixed costs of . Another division wants to purchase the component. What is the minimum transfer price if the division is operating at capacity?

Complete Question:

Palmo Company has a division that manufactures a component that sells for $66 and has variable costs of $29 and fixed costs of $19. Another division wants to purchase the component. What is the minimum transfer price if the division is operating at capacity?

A. $48

B. $66

C. $19

D. $29

Option D. $66 per unit

Explanation:

The transfer price can be calculated using the following Formula if the division is working at full capacity:

Lowest Transfer Price = Variable cost per unit + Contribution lost Per unit

Here

Variable cost per unit  is $29

Contribution lost Per unit = $66 - $29 = $37

By putting values in the above equation, we have:

Lowest Transfer Price = $29 + $37 = $66 per unit which is the market price of the company. If the company wasn't operating at full capacity then the minimum transfer price would be variable cost only because we will not have any contribution lost losses. This means that if the division is operation at full capacity the transfer price would be market price.

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