Division A makes a part with the following characteristics Production capacity i
ID: 2515159 • Letter: D
Question
Division A makes a part with the following characteristics Production capacity in units Selling price to outside customers (per unit) Variable cost per unit Fixed costs per unit 50,000 $30 $18 $3 Division B, another division of the same company, would like to purchase this part each from Division A. Division B is currently purchasing this part from an outside supplier at a price of $28 per unit. If Division A sells to Division B $1 in variable costs can be avoided Suppose that Division A has ample idle capacity to handle all of Division B's needs without any increase in fixed costs and without cutting into its sales to outside customers. From the point of view of Division A, any sales to Division B should be priced no lower than which of the following? O a. $30 o b. $29 O C. $18 o d. $17 e. None of the answers providedExplanation / Answer
The answer is Option - D $17
It is given that it is assumed that Division A has ample idle capacity and sales to outside customers will not be affected. This means that transfer price will be equal to relevant cost. Relevant cost equals to the variable cost to be incurred in the production of 1 unit (in this case).
Relevant Variable COst per unit = Variable cost per unit - Variable cost that will be avoided as aa result of internal transfer = $18 - $1 = $17 per unit.
Hence, correct answer is $17 as the minimum transfer price.