Division A makes a part with the following characteristics Production capacity i
ID: 2571055 • Letter: D
Question
Division A makes a part with the following characteristics Production capacity in unit Selling price to outside customers Variable cost per unit Total fixed costs 15,000 units $25 S18 60,000 Division B, another division of the same company, would like to purchase 5,000 units of the part each period from Division A. Division A is currently selling 10,000 units to its outside customers. IF the transfer is made, variable costs will decrease by $2 per unit. What should be the lowest acceptable transfer price from the perspective of Division A? ENTER YOUR ANSWER WITHOUT DOLLAR SIGNS OR OTHER DISCRIPTIONSExplanation / Answer
16)
Production capacity = 15000 units
Selling quantity = 10000 units
unused capacity = 15000 - 10000 = 5000 units
If there is unsed capacity in division, then transfer can be made at variable cost upto such unused capacity.
Here 5000 units is demanded by Division B and unused capacity is also 5000 units then transfer can be made at variable cost but it is given in question that vaariable cost will be reduced by $2 if such transfer made. so,
Lowest acceptable tranfer price = 18 - 2 = 16
14)
Production capacity = 15000 units
Selling quantity = 15000 units
unused capacity = 15000 - 15000 = 0 unit
If there is unsed capacity in division, then transfer can be made at variable cost upto such unused capacity but if there is no such unused capacity then transfer should be made at Variable cost + opportunity cost which is equivlent to selling price. So, in this case, transfer should be made at selling price.
Lowest acceptable transfer price = 25