Question

Division X makes a part with the following characteristics: Production capacity in units Sales to outside customers Selling price to outside customers Variable cost per unit Total fixed costs 40,000 units 35,000 units $50 $30 $200,000 Division Y, another division of the same company, would like to purchase 4,000 units of the part each period from Division X. Division Y is now purchasing these parts from an outside supplier at a price of $48 each. Managers of each division are free to make decisions related to purchases and sales of its own products. The minimum transfer price is:________.
a) $48.
b) $35.
c) $30.
d) $50

Answer 1

Answer:

Minimum transfer price=  $30

Explanation:

The transferring division, Division X currently has excess capacity which is equal to

The total capacity - external sales = 40,000 - 35,000 = 5,000 units

This implies that it can meet the sales request of division Y from the excess capacity without any opportunity cost.

In this situation, where the there is no opportunity cost associated with transfer, the minimum transfer price would be :

Minimum transfer price ≥ unit variable cost

Note that unit variable cost  is $30.

The unit variable cost of $30 represents the relevant cost per unit of producing a unit

Minimum transfer price=  $30

A price between $30 and $48 would be acceptable to both divisions