E8-11 - (b Assuming that the Small Motor Division does not...

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E8-11 Allied Company’s Small Motor Division manufactures a number of small motors used in household and office appliances. The Household Division of Allied then assembles and packages such items as blenders and juicers. Both divisions are free to buy and sell any of their components internally or externally. The following costs relate to small motor LN233 on a per unit basis. Fixed cost per unit $ 5 Variable cost per unit 8 Selling price per unit 30 Instructions (a) Assuming that the Small Motor Division has excess capacity, compute the minimum acceptable price for the transfer of small motor LN233 to the Household Division. When the excess capacity is available the minimum acceptable transfer price is the variable cost per unit. Fixed cost is irrelevant cost, as the units sold externally will recover it and the only additional cost to produce units for internal use is variable cost. The minimum transfer price per unit when excess capacity is available is $8 (Variable cost)
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Unformatted text preview: (b) Assuming that the Small Motor Division does not have excess capacity, compute the minimum acceptable price for the transfer of the small motor to the Household Division. When no excess capacity is available, transfer price of motor LN233 will be the variable cost per unit and the opportunity cost. Here Contribution lost per unit is the opportunity cost per unit. Selling price per unit $30 Variable cost per unit $8 Fixed cost per unit $5 Contribution cost = selling Price – variable cost $30 – $8 = $22 Contribution cost = $22 Transfer price per unit = Variable cost per unit + Contribution cost per unit $8 + $22 = $30 Transfer price per unit = $30 (c) Explain why the level of capacity in the Small Motor Division has an effect on the transfer price. When there is no or limited capacity the transfer price needs to at least cover its variable cost per motor plus its lost contribution margin per motor, referred to as the opportunity cost....
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