Division X of Operandi Corporation makes and sells a single product which is used by manufacturers of fork lift trucks. Currently, it sells 12,000 units per year to outside customers at $24 per unit. The annual capacity is 20,000 units and the variable costs to make each unit is $16. Division Y of Operandi 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?
A) $24.00.
B) $21.40.
C) $17.60.
D) $16.00.

Question

Quizplus · Accepted Answer

The lowest acceptable transfer price from the perspective of Division X is $17.60. This is because Division X would be willing to sell the units to Division Y at a price that is equal to the variable cost of producing the units, which is $16.00. Division X would not be willing to sell the units to Division Y at a price that is below the variable cost of producing the units, as this would result in a loss for Division X.

Division X of Operandi Corporation Makes and Sells a Single