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the heating division of kobe international produces a heating element that it sells to its customer for 45 dollars per unit. its unit varible cost is 25 dollars and its unit fixed cost is 10 dollars. top management of kobe international would like the heating division to transfer 15000 heating units to another division within the company at a price of 29 dollars. the heating division of operating at full capacity. what is the mininum transfer price that the heating division should accept?
the heating division of kobe international produces a heating element that it sells to its customer for 45 dollars per unit. its unit varible cost is 25 dollars and its unit fixed cost is 10 dollars. top management of kobe international would like the heating division to transfer 15000 heating units to another division within the company at a price of 29 dollars. the heating division of operating at full capacity. what is the mininum transfer price that the heating division should accept?
Final answer:The minimum transfer price that the Heating Division of Kobe International should accept is $45 per unit, as this price covers both the variable cost of $25 per unit and the contribution margin of $20 per unit that would be lost if the units were sold externally.Explanation:The student is asking about the minimum transfer price that the Heating Division of Kobe International should accept for transferring heating units to another division within the company. The heating division is currently operating at full capacity, with a selling price of $45 per unit, a variable cost of $25 per unit, and a fixed cost of $10 per unit. However, top management is requesting a transfer price of $29 per unit.In terms of transfer pricing, the minimum transfer price (MTP) that the heating division should accept when operating at full capacity would normally be its marginal cost, which is the variable cost of producing one more unit. Since the heating division is at full capacity, the opportunity cost of transferring units internally also needs to be considered. Therefore, the MTP would be the sum of the unit variable cost and the contribution margin lost on sales that could have been made externally. As they sell the unit for $45 and the variable cost is $25, the contribution margin per unit is $20 ($45 - $25). Thus, the MTP should be at least the variable cost plus the contribution margin, which is $45. Any price lower than this would result in a loss of profit for the heating division compared to selling the unit externally....