The Bathtub Division of Shatner Plumbing Corporation has recently approached the Faucet Division with a proposal. The Bathtub Division would like to make a special “ivory” tub with gold-plated fixtures for the company’s 50-year anniversary. It would make only 5,000 of these units. It would like the Faucet Division to make the fixtures and provide them to the Bathtub Division at a transfer price of $160. If sold externally, the estimated variable cost per unit would be $135. However, by selling internally the Faucet Division would save $6 per unit on variable selling expenses. The Faucet Division is currently operating at full capacity. Its standard unit sells for $50 per unit and has variable costs of $29.
Instructions
Compute the minimum transfer price that the Faucet Division should be willing to accept, and discuss whether it should accept this offer.