Wigelsworth Products, Inc., has a Sensor Division that manufactures and sells a number of products, including a standard sensor. Data concerning that sensor appear below: The Safety Products Division of Wigelsworth Products, Inc needs 6,000 special heavy-duty sensors per year. The Sensor Division's variable cost to manufacture and ship this special sensor would be $32 per unit. Because these special sensors require more manufacturing resources than the standard sensor, the Sensor Division would have to reduce its production and sales of standard sensors to outside customers from 89,000 units per year to 79,400 units per year.
From the standpoint of the Sensor Division, what is the minimal acceptable transfer price for the special sensors for the Safety Products Division?
A) $60.00 per unit
B) $67.00 per unit
C) $69.00 per unit
D) $91.20 per unit

Question

Wigelsworth Products, Inc., has a Sensor Division that manufactures and sells a number of products, including a standard sensor. Data concerning that sensor appear below:  The Safety Products Division of Wigelsworth Products, Inc needs 6,000 special heavy-duty sensors per year. The Sensor Division's variable cost to manufacture and ship this special sensor would be $32 per unit. Because these special sensors require more manufacturing resources than the standard sensor, the Sensor Division would have to reduce its production and sales of standard sensors to outside customers from 89,000 units per year to 79,400 units per year.
From the standpoint of the Sensor Division, what is the minimal acceptable transfer price for the special sensors for the Safety Products Division?
A) $60.00 per unit 
B) $67.00 per unit 
C) $69.00 per unit 
D) $91.20 per unit

Quizplus · Accepted Answer

To produce the 6,000 special sensors, the Sensor Division will have to give up sales of 9,600 of the regular sensors to outside customers.
 11eacbfc_c7d0_ac52_8ffe_fd142d17afc1_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 > $32.00 per unit + ($355,200 ÷ 6,000 units) = $32.00 per unit + $59.20 per unit = $91.20 per unit