Allied Company's Small Motor Division manufactures a number of small motors employed in household and office appliances. The Household Division of Allied then assembles and packages these items as blenders and juicers. Both divisions are free to purchase and sell any of their components internally or externally. The given costs relate to small motor LN233 on a per unit basis.
Fixed cost per unit $5
Variable cost per unit $8
Selling price per unit $30
Instructions:
a) Supposing that the Small Motor Division has surplus capacity, calculate the minimum acceptable price for the transfer of small motor LN233 to the Household Division.
b) Supposing that the Small Motor Division doesn't have surplus capacity, calculate the minimum acceptable price for the transfer of the small motor to the Household Division.
c) Describe why the level of capacity in the Small Motor Division has a consequence on the transfer price.