Bacot Products, Inc., has a Valve Division that manufactures and sells a number of products, including a standard valve that could be used by another division in the company, the Pump Division, in one of its products. Data concerning that valve appear below: The Pump Division is currently purchasing 8,000 of these valves per year from an overseas supplier at a cost of $47 per valve.
Assume that the Valve Division is selling all of the valves it can produce to outside customers. What should be the minimum acceptable transfer price for the valves from the standpoint of the Valve Division?
A) $47 per unit
B) $28 per unit
C) $45 per unit
D) $53 per unit

Question

Bacot Products, Inc., has a Valve Division that manufactures and sells a number of products, including a standard valve that could be used by another division in the company, the Pump Division, in one of its products. Data concerning that valve appear below:  The Pump Division is currently purchasing 8,000 of these valves per year from an overseas supplier at a cost of $47 per valve.
Assume that the Valve Division is selling all of the valves it can produce to outside customers. What should be the minimum acceptable transfer price for the valves from the standpoint of the Valve Division?
A) $47 per unit 
B) $28 per unit 
C) $45 per unit 
D) $53 per unit

Quizplus · Accepted Answer

The total contribution margin on lost sales is computed as follows:
 11eacbfc_c7d2_a832_8ffe_7790d60361bd_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 > $28 per unit + ($200,000 ÷ 8,000 units) = $28 per unit + $25 per unit = $53 per unit