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 only 50,000 units per year, then according to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?
A) $35 per unit
B) $33 per unit
C) $28 per unit
D) $23 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 only 50,000 units per year, then according to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?
A) $35 per unit 
B) $33 per unit 
C) $28 per unit 
D) $23 per unit

Quizplus · Accepted Answer

The selling division should set the transfer price at the outside supplier's price of $33 per unit or below. Since outside customer demand is only 50,000 units per year, the selling division should be willing to transfer all 15,000 units to the internal division at a price lower than $33 per unit. The lowest acceptable transfer price for the selling division would be the variable cost of producing the part, which is $23 per unit. Therefore, the best choice is D.

Division P of the Nyers Company Makes a Part That