Corning Company has a decentralized organization with a divisional structure. Two of these divisions are the Appliance Division and the Manufactured Housing Division. Each divisional manager is evaluated on the basis of ROI. The Appliance Division produces a small automatic dishwasher that the Manufactured Housing Division can use in one of its models. Appliance can produce up to 20,000 of these dishwashers per year. The variable costs of manufacturing the dishwashers are $98. The Manufactured Housing Division inserts the dishwasher into the model house and then sells the manufactured house to outside customers for $73,000 each. The division's capacity is 4,000 units. The variable costs of the manufactured house (in addition to the cost of the dishwasher itself) are $42,600.

Required:
Assume that all of the dishwashers produced can be sold to external customers for $328 each. The Manufactured Housing Division wants to buy 5,400 dishwashers per year. What should the transfer price be?

Minimum Transfer Price is the price that is acceptable to the transferring division and out of a range of acceptable prices, it is that which would be the best for the company

Minimum Transfer Price = Variable Cost - Internal Savings + Opportunity Cost

thus,

given the following data on the Transferring Division - Appliance Division and Receiving Division,

Appliance Division :

Total Capacity = 20,000 dishwashers

Total Variable Costs = $98

Sale Price to External Market = $328

Manufactured Housing Division :

Demand = 5,400 dishwashers

House Sale Price = $73,000

Total Capacity = 4,000 houses

Variable Costs = $42,600

there will be an opportunity costs on the external market for 5,400 dishwashers supplied internal to Manufactured Housing Division

Opportunity costs = Contribution per unit

= $328 - $98

= $230

therefore,

Minimum Transfer Price = $98 + $230 = $328

2. Maximum Transfer Price

It is the maximum price that causes the receiving division to break even. The Maximum Transfer Price can never be more than what the receiving division can purchase externally and also can never be more than the selling price of transferring division

thus,

Maximum Transfer Price = $328

Conclusion :

The transfer price should be $328