Question

Wetherald Products, Inc., has a Pump Division that manufactures and sells a number of products, including a standard pump that could be used by another division in the company, the Pool Products Division, in one of its products. Data concerning that pump appear below: Capacity in units 64,500 Selling price to outside customers $ 120 Variable cost per unit $ 72 Fixed cost per unit (based on capacity) $ 30 The Pool Products Division is currently purchasing 5,900 of these pumps per year from an overseas supplier at a cost of $93 per pump. Assume that the Pump Division is selling all of the pumps it can produce to outside customers. What should be the minimum acceptable transfer price for the pumps from the standpoint of the Pump Division

Answer 1

Answer:

$120 per unit

Explanation:

The computation of minimum acceptable transfer price is shown below:-

If the division of the transferor does not have spare capacity, the minimum transfer price is equal to variable cost per unit and the contribution margin per unit

Minimum transfer price = Variable cost per unit + (Selling price to outside customers - Variable cost per unit)

= $72 + ($120 - $72)

= $72 + $48

= $120 per unit

Therefore for computing the minimum transfer price we simply applied the above formula.