Dockside Enterprises Inc. ,operates two divisions: (1)a management division that owns and manages bulk carriers on the Great Lakes and (2)a repair division that operates a dry dock in Tampa,Florida.The repair division works on company ships,as well as other large-hull ships.The repair division has an estimated variable cost of $37 per labor-hour.The repair division has a backlog of work for outside ships.They charge $70.00 per hour for labor,which is standard for this type of work.The management division complained that it could hire its own repair workers for $45.00 per hour,including leasing an adequate work area.If the repair division had idle capacity,what is the minimum transfer price that the repair division should obtain?

Question

Quizplus · Accepted Answer

The minimum transfer price that the repair division should obtain is the variable cost per labor-hour, which is $37. This is because if the repair division charges anything lower than their variable cost, they will incur losses. Moreover, the management division can already hire their own repair workers for $45, so anything higher than that would not make sense for them to pay to the repair division. However, charging the standard rate of $70 is not necessary since the repair division already has idle capacity and can afford to sell their services at a lower price.