Division X of Charter Corporation makes and sells a single product that\'s used
ID: 3103245 • Letter: D
Question
Division X of Charter Corporation makes and sells a single product that's used by manufacturers of forklift trucks. Presently it sells 12,000 units per year to outside customers at $24 per unit. The annual capacity is 20,000 units, and the variable cost to make each unit is $16. Division Y of Charter Corporation would like to buy 10,000 units a year from Division X to use in its products. There would be no cost savings from transferring the units within the company rather than selling them on the outside market. What should be the lowest acceptable transfer price from the perspective of Division X?Explanation / Answer
capacity = 20,000 units
current sales = 12,000 units @ $24 ea
variable cost of 12,000 units = $16 ea
First we need to find the variable cost equation:
y=mx+b
16=m(12000)+0
1/750=m
Thus we have:
variable cost = (1/750)(total units)
The variable price per unit for 10,000 units would be: $13.33 ea
Thus total variable cost for 10,000 units would be: $133,300.00
Now, Division X is also losing money from the transfer of 2000 units [20,000(capacity)-12,000(selling)-10,000(Division X)]. This would amount to:
2000 units * ($24 per unit - $16 variable) = $16,000 profit
Thus a reasonable transfer price would be: $133,300 + $16,000 = $149,300 total