Division P of the Nyers Company makes a part that can either be sold to outside customers or transferred internally to Division Q for further processing. Annual data relating to this part are as follows: Division Q of the Nyers Company requires 15,000 units per year and is currently paying an outside supplier $33 per unit. Consider each part below independently.
If outside customers demand 70,000 units, then according to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division for each of the 15,000 units needed by Q?
A) $33 per unit
B) $27 per unit
C) $28 per unit
D) $29 per unit

Question

Division P of the Nyers Company makes a part that can either be sold to outside customers or transferred internally to Division Q for further processing. Annual data relating to this part are as follows:  Division Q of the Nyers Company requires 15,000 units per year and is currently paying an outside supplier $33 per unit. Consider each part below independently.
If outside customers demand 70,000 units, then according to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division for each of the 15,000 units needed by Q?
A) $33 per unit 
B) $27 per unit 
C) $28 per unit 
D) $29 per unit

Quizplus · Accepted Answer

Available capacity for outside sales = Capacity − Internal sales
= 80,000 units − 15,000 units = 65,000 units
Lost outside sales = Total outside demand − Available capacity for outside sales
= 70,000 units − 65,000 units = 5,000 units
Total contribution margin on lost sales = CM per unit × Lost outside sales
= ($35 per unit − $23 per unit) × 5,000 units = $60,000
From the perspective of the selling division, profits would increase as a result of the transfer if and only if:
Transfer price > Variable cost per unit + Opportunity cost per unit
Transfer price > Variable cost per unit + (Total contribution margin on lost sales ÷ Number of units transferred)
Transfer price > $23 per unit + ($60,000 ÷ 15,000 units)
Transfer price > $23 per unit + $4 per unit = $27 per unit

Division P of the Nyers Company Makes a Part That