Division C makes a part that it sells to customers outside of the company. Data concerning this part appear below: Division D of the same company would like to use the part manufactured by Division C in one of its products. Division D currently purchases a similar part made by an outside company for $79 per unit and would substitute the part made by Division C. Division D requires 1,000 units of the part each period. Division C has ample excess capacity to handle all of Division D's needs without any increase in fixed costs and without cutting into outside sales. What is the lowest acceptable transfer price from the standpoint of the selling division?
A) $75
B) $79
C) $54
D) $69

Question

Division C makes a part that it sells to customers outside of the company. Data concerning this part appear below:  Division D of the same company would like to use the part manufactured by Division C in one of its products. Division D currently purchases a similar part made by an outside company for $79 per unit and would substitute the part made by Division C. Division D requires 1,000 units of the part each period. Division C has ample excess capacity to handle all of Division D's needs without any increase in fixed costs and without cutting into outside sales. What is the lowest acceptable transfer price from the standpoint of the selling division?
A) $75 
B) $79 
C) $54 
D) $69

Quizplus · Accepted Answer

Because there is no opportunity cost, the selling division should not accept any transfer price less than its variable cost of $54 per unit.

Division C Makes a Part That It Sells to Customers