Question

Division X makes a part that it sells to customers outside of the company. Data concerning this part appear below: Selling price to outside customers $ 50 Variable cost per unit $ 30 Total fixed costs $ 400,000 Capacity in units 25,000 Division Y of the same company would like to use the part manufactured by Division X in one of its products. Division Y currently purchases a similar part made by an outside company for $49 per unit and would substitute the part made by Division X. Division Y requires 5,000 units of the part each period. Division X has ample excess capacity to handle all of Division Y's needs without any increase in fixed costs and without cutting into outside sales.
According to the formula in the text, what is the lowest acceptable transfer price from the standpoint of the selling division?

Answer 1

Answer:

Minimum Transfer price = $30

Explanation:

The Division X is operating at less than full capacity, hence it has excess capacity

This implies that it can produce enough to meet both the internal and external buyers.

Since Division X can accommodate the demands of division Y without necessarily increasing fixed cost, hence the minimum transfer price

minimum transfer price= Variable cost= $30 per unit

Any price range of $30 and above would be an acceptable transfer in the interest of the two divisions and the group.