Chen Companys Small Motor Division manufactures a number of small motors

used in household and offi ce 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.