Division X makes a part that it sells to customers outside of the company. Data
ID: 2408303 • 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 $49 per unit and would substitute the part made by Division X. Division Y requires 5,640 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?
Division X makes a part that it sells to customers outside of the company. Data concerning this part appear below:
Explanation / Answer
If the Divison Y is supplied with 5640 units, the company will lose 5640 unit outside sales. Transfer Price will be equal to = Variable Cost + Contribution lost on unisold in outside market. = $45 / unit + (SP-VC) = $45 / unit + $4 $49/unit Divison X 'slowest acceptable price will be $49