Question

The following information applies to the questions displayed below.] In each of the cases below, assume Division X has a product that can be sold either to outside customers or to Division Y of the same company for use in its production process. The managers of the divisions are evaluated based on their divisional profits
Case
A B
Division X:
Capacity in units 101,000 91,000
Number of units being sold to outside customers 101,000 71,000
Selling price per unit to outside customers 54 26
Variable costs per unit 26 12
Fixed costs per unit (based on capacity) 10 4
Division Y:
Number of units needed for production 20,000 20,000
Purchase price per unit now being paid to 45 $24
an outside supplier
Refer to data in case B above . In this case there will be no saving in variable selling cost on intra company sales .
What is the lowest acceptable transfer price from the perspective of selling division?

Answer 1

Answer:

$12

Explanation:

Calculation to determine the lowest acceptable transfer price from the perspective of selling division

Using this formula

Lowest Transfer Price = Variable Costs per unit - Internal Savings + Opportunity Cost

Where,

Variable Costs per unit = $12

Internal Savings = $0

Opportunity Cost = $0

Let plug in the formula

Lowest Transfer Price = $12-$0+$0

Lowest Transfer Price = $12

Therefore the lowest acceptable transfer price from the perspective of selling division is $12