Delemos Products, Inc., has a Transmitter Division that manufactures and sells a number of products, including a standard transmitter. Data concerning that transmitter appear below: The Remote Devices Division of Delemos Products, Inc needs 6,000 special heavy-duty transmitters per year. The Transmitter Division's variable cost to manufacture and ship this special transmitter would be $66 per unit. Because these special transmitters require more manufacturing resources than the standard transmitter, the Transmitter Division would have to reduce its production and sales of standard transmitters to outside customers from 83,000 units per year to 76,400 units per year.
From the standpoint of the Transmitter Division, what is the minimal acceptable transfer price for the special transmitters for the Remote Devices Division?
A) $90.00 per unit
B) $98.00 per unit
C) $104.00 per unit
D) $107.80 per unit

Question

Delemos Products, Inc., has a Transmitter Division that manufactures and sells a number of products, including a standard transmitter. Data concerning that transmitter appear below:  The Remote Devices Division of Delemos Products, Inc needs 6,000 special heavy-duty transmitters per year. The Transmitter Division's variable cost to manufacture and ship this special transmitter would be $66 per unit. Because these special transmitters require more manufacturing resources than the standard transmitter, the Transmitter Division would have to reduce its production and sales of standard transmitters to outside customers from 83,000 units per year to 76,400 units per year.
From the standpoint of the Transmitter Division, what is the minimal acceptable transfer price for the special transmitters for the Remote Devices Division?
A) $90.00 per unit 
B) $98.00 per unit 
C) $104.00 per unit 
D) $107.80 per unit

Quizplus · Accepted Answer

To produce the 6,000 special transmitters, the Transmitter Division will have to give up sales of 6,600 of the regular transmitters to outside customers.
 11eacbfc_c7cf_c1ec_8ffe_9b52ce5f94cd_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 > $66.00 per unit + ($250,800 ÷ 6,000 units) = $66.00 per unit + $41.80 per unit = $107.80 per unit