Freberg Company, a division of Dudge Cars, produces automotive batteries and sells them to its customers for $92 per unit. The variable cost per unit is $55, and fixed costs per unit are $16.

Top management of Dudge Cars would like Freberg to transfer 30,000 special, high-performance batteries to another division within the company. Freberg’s variable cost on these special batteries is $62 per unit. Freberg is operating at full capacity.

Compute the minimum transfer price that Freberg should accept.

In the context of transfer pricing in business, the minimum transfer price that Freberg Company should accept under full capacity operations is $99. This calculation includes the variable cost ($62) and the opportunity cost of lost profit from external sales ($37).

Explanation:

The question addresses a concept in managerial accounting pertaining to intra-company transactions, specifically transfer pricing. Transfer pricing is the price at which divisions of a company transact with each other. In this case, we need to find the minimum transfer price for Freberg Company under the constraints given.

In the given scenario, Freberg Company is operating at full capacity. This suggests that the opportunity cost of doing the internal transaction should be included in the cost calculation. The variable cost for the special batteries is $62. Since there won't be any sales to external customers because Freberg is operating at full capacity, the lost profit per battery (opportunity cost) would be the external selling price ($92) minus the variable costs ($55), resulting in $37. The minimum transfer price thus should cover the variable cost and the opportunity cost, totalling $62 (variable cost) + $37 (opportunity cost) = $99.

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