Division A makes a part that it sells to customers outside of the company. Data

Question

Division A makes a part that it sells to customers outside of the company. Data concerning this part appear below:

Division B of the same company would like to use the part manufactured by Division A in one of its products. Division B currently purchases a similar part made by an outside company for $38 per unit and would substitute the part made by Division A. Division B requires 5,000 units of the part each period. Division A has ample capacity to produce the units for Division B without any increase in fixed costs and without cutting into sales to outside customers. If Division A sells to Division B rather than to outside customers, the variable cost be unit would be $1 lower. What should be the lowest acceptable transfer price from the perspective of Division A?

$38

$10

$40

$30

$29

Selling price to outside customers $40 Variable cost per unit $30 Total fixed costs $10,000 Capacity in units $20,000

Explanation / Answer

Acceptable transfer price = variable cost $30 - $ saving $1 = $29

Since it has sufficient capacity it will like to cover its variable cost which is $30 and since there will be saving of $1 , lowest acceptable price will be $29

Acceptable transfer price = variable cost $30 - $ saving $1 = $29

Since it has sufficient capacity it will like to cover its variable cost which is $30 and since there will be saving of $1 , lowest acceptable price will be $29

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