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.

Unit fixed cost .................$5
Unit variable cost............ 11
Unit selling price .............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.