Question

The Appraisal Department of Swifty Bank performs appraisals of business properties for loans being considered by the bank and appraisals for home buyers that are financing their purchase through some other financial institution. The department charges $163per home appraisal, and its variable costs are $130.21 per appraisal.
Recently, Jean Bank has opened its own Home-Loan Department and wants the Appraisal Department to perform 1,100 appraisals on all Jean Bank–financed home loans. Bank management feels that the cost of these appraisals to the Home-Loan Department should be $150.42. The variable cost per appraisal to the Home-Loan Department would be $7.82 less than those performed for outside customers due to savings in administrative costs.

a. Determine the minimum transfer price, assuming the Appraisal Department has excess capacity.

b. Determine the minimum transfer price, assuming the Appraisal Department has no excess capacity.

c. Assuming the Appraisal Department has no excess capacity, should management force the department to charge the Home-Loan Department only $150.42?

Answer 1

Answer:

(a) In case when Appraisal Department has excess capacity then minimum transfer will be:

($130.21 - $7.82) = $122.39

Minimum Transfer Price = $122.39

(b) In case when Appraisal Department has no excess capacity then minimum transfer price will be:

($130.21 - $7.82) + ($163 - $130.21) = $155.18

Minimum Transfer Price = $155.18

(c) No, the management should not force to charge the Home- Loan department only $150.42.