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What is the lowest acceptable transfer price

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Reference no: EM13553444

The Commando Motorcycle Company has decided to become decentralized and split its operations into two divisions, Motor and Assembly. Both divisions will be treated as investment centers. The Motor Division is currently operating at its capacity of 30,000 motors per year. Motor's costs at this level of production are as follows:


 Cost per motor
Direct materials $ 30
Direct labor 50
Variable manufacturing overhead 20
Fixed manufacturing overhead 25
Variable selling and administrative 5
Fixed selling and administrative

10
Total cost per motor

$140

Motor sells 10,000 of its motors to a snowmobile manufacturer and transfers the remaining 20,000 motors to the Assembly Division. The two divisions are currently in a debate over an appropriate transfer price to charge for the 20,000 motors. Motor currently charges the snowmobile manufacturer $200 per motor. The final selling price of the motorcycles that Commando produces is $7,200 per cycle. This selling price will not change regardless of the transfer price charged between the two divisions. Motor has no market for the 20,000 motors if they are not transferred to Assembly. Variable selling and administrative costs are incurred on both internal and external sales.

According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?

Reference no: EM13553444

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