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Brief Exercise 8-7 The Heating Division of Kobe International produces a heating element that it sells to its customers for $44 per unit. Its variable cost per unit is $25, and its fixed cost per unit is $12. Top management of Kobe International would like the Heating Division to transfer 14,600 heating units to another division within the company at a price of $30. The Heating Division is operating at full capacity. What is the minimum transfer price that the Heating Division should accept?

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Answer:

Transfer price= $37

Explanation:

Giving the following information:

Its variable cost per unit is $25, and its fixed cost per unit is $12. Top management of Kobe International would like the Heating Division to transfer 14,600 heating units to another division within the company for $30.

If the Heating division is not operating ar full capacity, the fixed costs shouldn´t be taken into account. In this case, the Heating Division is operating at full capacity. The minimum transfer price must include both fixed and variable costs.

Transfer price= fixed costs + variable cost

Transfer price= 12 + 25= $37

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