Problem
Frocks and Gowns, Incorporated, has two divisions, Day Wear and Night Wear. The Day Wear Division has an investment base of $850,000 and produces and sells 130,000 units of Collars at a market price of $10.70 per unit. Variable costs for the Collars total $5.00 per unit and fixed charges are $3.50 per unit (based on a capacity of136,000 units). The Night Wear Division wants to purchase 24,000 units of Collars from the Day Wear Division. However, the Night Wear Division is only willing to pay $6.65 per unit.
What is the minimum transfer price that the Day Wear Division would accept for the 24,000 unit order from the Night Wear Division if it wishes to maintain its pre-order contribution margin?