(Appendix 12A)Division 1 of Ace Company makes and sells wheels that can either be sold to outside customers or transferred to Division 2.The following data are available from last month: Division 1: Division 2: If Division 1 sells the wheels to Division 2, Division 1 can avoid $2 per unit in sales commissions.
Suppose that Division 1 sells 11, 500 units each month to outside customers.According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?
A)$47.00 per unit
B)$43.50 per unit
C)$37.50 per unit
D)$34.73 per unit

Question

(Appendix 12A)Division 1 of Ace Company makes and sells wheels that can either be sold to outside customers or transferred to Division 2.The following data are available from last month: Division 1:  Division 2:  If Division 1 sells the wheels to Division 2, Division 1 can avoid $2 per unit in sales commissions.
Suppose that Division 1 sells 11, 500 units each month to outside customers.According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?
A)$47.00 per unit 
B)$43.50 per unit 
C)$37.50 per unit 
D)$34.73 per unit

Quizplus · Accepted Answer

Available capacity for outside sales = Capacity - Internal sales
= 15, 000 units - 5, 000 units = 10, 000 units
Lost outside sales = Total outside demand - Available capacity for outside sales
= 11, 500 units - 10, 000 units = 1, 500 units
Total contribution margin on lost sales = CM per unit × Lost outside sales
= ($50 per unit - $35 per unit)× 1, 500 units = $22, 500
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 > ($35 per unit - $2 per unit)+ ($22, 500 ÷ 5, 000 units)= $33.00 per unit + $4.50 per unit = $37.50 per unit

(Appendix 12A)Division 1 of Ace Company Makes and Sells Wheels