Nanke Products, Inc., has a Sensor Division that manufactures and sells a number of products, including a standard sensor that could be used by another division in the company, the Safety Products Division, in one of its products. Data concerning that sensor appear below: The Safety Products Division is currently purchasing 3,000 of these sensors per year from an overseas supplier at a cost of $59 per sensor.
Assume that the Sensor Division is selling all of the sensors it can produce to outside customers. What should be the minimum acceptable transfer price for the sensors from the standpoint of the Sensor Division?
A) $37 per unit
B) $59 per unit
C) $20 per unit
D) $64 per unit

Question

Nanke Products, Inc., has a Sensor Division that manufactures and sells a number of products, including a standard sensor that could be used by another division in the company, the Safety Products Division, in one of its products. Data concerning that sensor appear below:  The Safety Products Division is currently purchasing 3,000 of these sensors per year from an overseas supplier at a cost of $59 per sensor.
Assume that the Sensor Division is selling all of the sensors it can produce to outside customers. What should be the minimum acceptable transfer price for the sensors from the standpoint of the Sensor Division?
A) $37 per unit 
B) $59 per unit 
C) $20 per unit 
D) $64 per unit

Quizplus · Accepted Answer

The total contribution margin on lost sales is computed as follows:
 11eacbfc_c7cd_50dd_8ffe_d56e57eeb47a_TB7552_00 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 + (Total contribution margin on lost sales ÷ Number of units transferred)
Transfer price > $20 per unit + ($132,000 ÷ 3,000 units) = $20 per unit + $44 per unit = $64 per unit