Reference no: EM132961027

Question - Pelican Company manufactures furniture. The Bed Division manufactures beds and can purchase wood frame from Wooden Furniture Division of the same company or from an outside vendor. The cost to purchase wood frame from outside vendor is $150 and the transfer price to purchase wood frame from Wooden Furniture Division is $180. The Wooden Furniture Division sells the wood frames for beds for $180 and the variable manufacturing cost and fixed manufacturing cost are $130 and $30 per unit.

What is the minimum transfer price the Wooden Furniture Division should consider if the Wooden Furniture Division has excess capacity?

If Pelican buys wood frames from an outside vendor, the fixed manufacturing cost is unavoidable. Should Pelican produce the wood frame by itself or purchase it from an outside vendor?