Question

Southern Pride Industries would like its Alabama Division to sell 30000 units to its Arkansas Division for a price of $39. The Alabama Division is currently operating at capacity. Alabama Division’s unit variable cost is $24, unit fixed cost is $15, and unit selling price is $60. What is the minimum transfer price that the Alabama Division should accept?

Answer 1

Answer:

The minimum transfer price that the Alabama Division should accept is $60 per unit.

Explanation:

The division providing the goods internally often has the opportunity to sell these same goods externally instead and so the minimum they will be willing to charge another division is cost plus their profit margin (i.e. the minimum they would normally charge an external customer).

the minimum price to be charged is :

Variable cost per unit = $24

Fixed Cost per unit = $15

Total Cost per unit = $39 and the profit margin when added makes its selling price to be equal to $60 (i.e. the price which is to be charged from outside customers).

Alabama Division will cover its minimum opportunity cost i.e. its sales price to the external customers which it will charge from Arkansas division .

Minimum transfer price = $60 per unit.

Therefore, The minimum transfer price that the Alabama Division should accept is $60 per unit.