Chen Company s Small Motor Division manufactures a

number of small #6061

Chen Company s Small Motor Division manufactures a number of small

Chen Company's Small Motor Division manufactures a number of small motors used in
household and office appliances. The Household Division of Chen then assembles and
packages such items as blenders and juicers. Both divisions are free to buy and sell any of their
components internally or externally. The following costs relate to small motor LN233 on a per
unit basis.

Fixed cost per unit .......................... $ 5

Variable cost per unit ....................... $11

Selling price per unit ........................ $35

Instructions

(a) Assuming that the Small Motor Division has excess capacity, compute the minimum
acceptable price for the transfer of small motor LN233 to the Household Division.

(b) Assuming that the Small Motor Division does not have excess capacity, compute the
minimum acceptable price for the transfer of the small motor to the Household Division.

(c) Explain why the level of capacity in the Small Motor Division has an effect on the transfer
price.

Chen Company s Small Motor Division manufactures a number of small

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