Division A offers its product to outside markets for $30. It incurs variable cos

Question

Division A offers its product to outside markets for $30. It incurs variable costs of $11 per unit and fixed
costs of $75,000 per month based on monthly production of 4,000 units. Division B can acquire the product
from an alternate supplier for $31 per unit or from Division A for $30 plus $2 per unit in transportation costs
in addition to the transfer price charged by Division A.

Required
a. What are the costs and benefits of the alternatives available to Division A and Division B with
respect to the transfer of Division A's product? Assume that Division A can market all that it can
produce.
b. How would your answer change if Division A had idle capacity sufficient to cover all of Division B's
needs?

Explanation / Answer

(a)

(b)

B
A
Company
Transfer internally Pays $32.00 Recieves $30.00 Pays $2.00


Pays $11.00 Pays $11.00





$13.00 Sell externally Pays $31.00 Recieves $30.00 Pays $1.00


Pays $11.00 Pays $11.00





$12.00

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