Division A of Tripper Company produces a part that it sells to other companies. Sales and cost data for the part follow: Division B, another division of Tripper Company, would like to buy this part from Division A. Division B is presently purchasing the part from an outside source at $38 per unit. If Division A sells to Division B, $1 in variable costs can be avoided.
Assume that Division A is presently operating at capacity. According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?
A) $37 per unit
B) $39 per unit
C) $36 per unit
D) $38 per unit

Question

Division A of Tripper Company produces a part that it sells to other companies. Sales and cost data for the part follow:  Division B, another division of Tripper Company, would like to buy this part from Division A. Division B is presently purchasing the part from an outside source at $38 per unit. If Division A sells to Division B, $1 in variable costs can be avoided.
Assume that Division A is presently operating at capacity. According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?
A) $37 per unit 
B) $39 per unit 
C) $36 per unit 
D) $38 per unit

Quizplus · Accepted Answer

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 > ($28 per unit − $1 per unit) + ($40 per unit − $28 per unit) = $27 per unit + $12 per unit = $39 per unit

Division a of Tripper Company Produces a Part That It