Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 38

Two-Part Transfer Prices

Refer to Problem 15-37. Suppose Health Services could sell time on the machine to other companies in the area on a per-hour basis. Further, it can sell all the time available for $30 per hour.

Required

a. What is the optimal transfer price rule Health Services should use to charge Optics?

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b. Suppose Optics uses 1,000 hours on the new machine. What is the average cost per hour Optics would pay using the rule you developed in part (a)?

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c. Suppose Optics uses 100 hours on the new machine. What is the average cost per hour Optics would pay using the rule you developed in part (a)?

Step 1 of 3

(A)

The narrative in question points towards an economy where the services provided by Health Service are readily saleable. Hence the managers of Health Service would not agree to sell its services at a price which is lower than market price which in this case is $ 30 per hour. And the total costs that Health Services would charge to Optics Division for 1000 hours would be $ 30,000.