Division T of Clocker Company makes a tnerwbich it sells for $30 to outside cust

Question

Division T of Clocker Company makes a tnerwbich it sells for $30 to outside customers. The division has supplied the following data concerning the timer: Monthly capacity Variable cost per unit Fixed cost per unit Division S of Clocker Company is currently buying 5,000 similar timers each month from an overseas supplier at $27 each. Division S would like to acquire its timers from Division T if the price is right. Suppose that Division T can sell only 10,000 timers to outside customers. What is the lowest acceptable transfer price from the viewpoint of the selling division? A. $24 per timer B. $27 per timer C. $30 per timer D. $15 per timer 12,000 timers $15 per timer $10 per timer

Explanation / Answer

Calculation of operating income:

(Selling price - variable cost = Contribution - fixed cost) per unit = Operating Income
$30 - $15 = $15 - $10 = $5
Thus, operating income = $5

Calculation of the lowest acceptable transfer price from the viewpoint of the selling division:

Transfer price = Variable cost per unit + Contribution margin on lost sales / No. of units transferred

= $15 + $15*5000/5000
= $15 + $15 = $30

Answer: Option C. $30 per timer

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