Division X makes a part that it sells to customers outside of the company. Data
ID: 2389683 • Letter: D
Question
Division X makes a part that it sells to customers outside of the company. Data concerning this part appear below:
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 $70 per unit and would substitute the part made by Division X. Division Y requires 5,000 units of the part each period. Division X can already sell all of the units it can produce on the outside market. What should be the lowest acceptable transfer price from the perspective of Division X?
Explanation / Answer
Opportunity cost = [($75 - $50) x 5,000] / 5,000 = $25
Therefore, Transfer price > $50 + $25 = $75