Answer:
Please find the detailed answer as follows
Explanation:
The case is pretty simple, and I’ll to be simple in explanation below:
Facts:
--Transfer price per unit should be atleast equal to the relevant cost per unit.
--Relevant cost per unit = Variable cost per unit + Contribution margin lost + Avoidable fixed cost.
--Since it is stated that fixed cost wont be affected and that there is idle capacity available, there wont be any ‘Contribution margin lost’ on outside sale AND ‘avoidable fixed cost.
--If Division A transfers, it would transfer at the relevant cost of $ 19 per unit, which is equal to the variable cost per unit.
--If Division A didn’t transfer, Division B will buy from outside at rate of $ 24 per unit.
Hence, Division B will purchase $ 24 per unit when it could get from Division A at $ 19.
Thereby, Division will be paying $ 5 per unit extra on 16100 units.
Division B and hence, the company as a whole will be WORSE by $ 80,500
[16100 units x $ 5 per unit]
Correct Answer = Option #3: Worse off by $ 80,500 each period.
The same is illustrated as attached image.
