Figure 20-2
Klaehn Industries is a decentralized company that evaluates its divisions based on ROI. The Fahl Division has the capacity to make 1,000 units of a component. The Fahl Division's variable costs are £40 per unit.
The Melton Division can use the component in one of its products. The Melton Division would incur £50 of variable costs to convert the component into its own product that sells for £160.
-Refer to Figure 20-2. Assume the Fahl Division can sell 800 units at £120 each. Any excess capacity will be unused unless the units are purchased by the Melton Division, which could use up to 100 units. The minimum transfer price that the Fahl Division would be willing to accept would be

Question

Quizplus · Accepted Answer

The minimum transfer price that the Fahl Division would be willing to accept is its variable cost of £40 per unit, since any price above this would cover its variable costs and contribute to covering its fixed costs and generating profit. The fact that the Fahl Division can sell 800 units at £120 each is irrelevant for the minimum transfer price for the excess capacity, as the question specifically asks for the minimum price for units beyond this initial 800, which would otherwise go unused.

Figure 20-2 Klaehn Industries Is a Decentralized Company That Evaluates Its Divisions