The per unit cost details are as followers:

Machining Finishing
Transferred in cost N/A $27
Variable cost $24 9.00
Allocated fixed costs 3.00 13.50
Full cost per unit 27.00 49.50

An external supplier has offered to supply a product to the Finishing
division at $21 per unit. This would eliminate the need for the
Machining divisions output.

What is the minimum at which the Machining division should
transfer its output to the Finishing division?

What is the maximum price that the Finishing division will be willing to pay?

The Machining division is only prepared to transfer its
component at full cost. Assuming management wants the transfer of the Machining division to continue, how could dual transfer pricing be used?

To determine the minimum price at which the Machining division should transfer its output to the Finishing division, we need to compare the current cost of machining per unit to the external supplier's offer.

1. The current cost of machining per unit is the transferred-in cost plus the variable cost plus the allocated fixed costs, which is $27 + $24 + $3 = $54.

2. The external supplier's offer is $21 per unit.

Since the external supplier's offer is lower than the current cost of machining, the minimum price at which the Machining division should transfer its output to the Finishing division is $21.

To determine the maximum price that the Finishing division will be willing to pay, we need to compare the maximum price it is willing to pay with the full cost per unit.

1. The full cost per unit of finishing is $49.50.

2. The maximum price that the Finishing division will be willing to pay is the current cost of finishing per unit, which is $49.50.

Therefore, the maximum price that the Finishing division will be willing to pay is $49.50.

If management wants the transfer of the Machining division to continue and the Machining division is only prepared to transfer its component at full cost, dual transfer pricing can be used. Dual transfer pricing involves setting a transfer price based on either the market price or the full cost, whichever is lower.

In this case, the external supplier's offer of $21 per unit is lower than the full cost of $54 per unit. Therefore, the transfer price for the Machining division's output to the Finishing division can be set at $21 per unit, using dual transfer pricing. This ensures that the Finishing division continues to receive the Machining division's output while maintaining the requested transfer price from the Machining division.