Figure 20-6
Callahan Industries is a decentralized company that evaluates its divisions based on ROI. The Jones Division has the capacity to make 5,000 units of a component. The Jones Division's variable costs are £200 per unit.
The Thomas Division can use the component in one of its products. The Thomas Division would incur £100 of variable costs to put the component in its own product that sells for £500.
-Refer to Figure 20-6. Assume the Jones Division can sell 4,000 units at £420. Any excess capacity will be unused unless the units are purchased by the Thomas Division, which could use up to 200 units. The minimum transfer price that the Jones Division would be willing to accept would be

Question

Quizplus · Accepted Answer

The minimum transfer price that the Jones Division would be willing to accept is equal to its variable costs of £200 per unit, since any price above this would cover its variable costs and contribute to covering its fixed costs and generating profit.

Figure 20-6 Callahan Industries Is a Decentralized Company That Evaluates Its Divisions