Answer:
The minimum transfer price shoud be $28.50.
Explanation:
The transfer price is determined by two factors:
(1) The idle capacity of the business;
(2) The price in the market.
In this case, the repair division has idle capacity. This means that the transfer price could be equal to, but not lower than, the variable cost of production.
The estimated variable cost is $28.50 per labor-hour. However, this cost must be compared with the market price first, which is $30 per labor-hour. Hence, hiring labor from outside at $30 per labor-hour shall be relatively expensive and not a good option to exercise.
Since, the variable cost is lower, Cruises, Inc. should provide labor at $28.50 per labor-hour. Because there is idle capacity, this is also the minimum transfer price that should be charged.