Question

Nanke Products, Inc., has a Sensor Division that manufactures and sells a number of products, including a standard sensor that could be used by another division in the company, the Safety Products Division, in one of its products. Data concerning that sensor appear below:
Capacity in units 58,000
Selling price to outside customers $64
Variable cost per unit $20
Fixed cost per unit (based on capacity) $17

The Safety Products Division is currently purchasing 3,000 of these sensors per year from an overseas supplier at a cost of $59 per sensor. Assume that the Sensor Division is selling all of the sensors it can produce to outside customers. What should be the minimum acceptable transfer price for the sensors from the standpoint of the Sensor Division?

Answer 1

Answer:

$64

Explanation:

The minimum acceptable transfer price for the sensors from the standpoint of the Sensor Division is a price that would be the best for the performance evaluation of the Sensor Division Manager and also best for the company.

If the division is transferring items to another division the goals remain the same and the price is calculated as :

Minimum acceptable transfer price = variable costs - internal savings + opportunity cost

Therefore,

Minimum acceptable transfer price =  $20 + ( $64 - $20)

                                                            = $64

Therefore, the minimum acceptable transfer price for the sensors from the standpoint of the Sensor Division is $64 assuming that there is an opportunity cost of $44 that is ($64 - $20).