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Kirk Bathtub

Price: $1.99


The Bathtub Division of Kirk 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 $140. 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.

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