Figure 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 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 variable costs contributes to covering fixed costs and profit. The Fahl Division's capacity to sell externally at £120 each is irrelevant for the minimum transfer price, as the question specifically asks for the minimum price Fahl would accept, which is essentially the cost it incurs to produce the component.

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