Detroit Shipping, Inc., operates two divisions: (1) a shipping division that owns and manages bulk carriers on the Great Lakes and (2) a repair division that operates a dry dock in Port Nelson, Ohio. The repair division works on company ships, as well as other large-hull ships.
The repair division has an estimated variable cost of $45 per labor-hour. The repair division has a backlog of work for outside ships. They charge $125 per hour for labor & overhead, which is standard for this type of work. The management division complained that it could hire its own repair workers for $85 per hour, including leasing an adequate work area.
Required:
a. What is the minimum transfer price per hour that the repair division should obtain for its services, assuming it is operating at capacity?
b. What is the maximum transfer price per hour that the shipping division should pay?
c. If the repair division had idle capacity, what is the minimum transfer price that the repair division should obtain?