Division X and Division Y are both subsidiaries of Company Z. Division X manufac
ID: 2499648 • Letter: D
Question
Division X and Division Y are both subsidiaries of Company Z. Division X manufactures a part that it sells to customers outside the company. Data concerning this part appear below.
Selling price to outside customers
$155
Variable cost per unit
$75
Contribution margin per unit
$80
Total fixed costs
$500,000
Fixed cost per unit at capacity
$20
Capacity in units
50,000 units
Division Y would like to use the part manufactured by Division X in one in one of its products. Division Y currently purchases a similar part made by an outside company for $88 per unit and would substitute the part made by Division X. Division Y requires 5,000 units of the part each period. Division X is currently producing and selling 25,000 units to outside customers. Producing additional parts for Division Y would not affect these sales. What is the minimum acceptable transfer price from the standpoint of Division X?
Selling price to outside customers
$155
Variable cost per unit
$75
Contribution margin per unit
$80
Total fixed costs
$500,000
Fixed cost per unit at capacity
$20
Capacity in units
50,000 units
Explanation / Answer
Division X is currently having ample excess production capacity. Thus, it will not havee to incur any fixed costs for producing additional units for Division Y. Also, there will not be any effect on sales.
Hence, minimum acceptable transfer price = Variable costs = $80