Division P of the Nyers Company makes a part that can either be sold to outside customers or transferred internally to Division Q for further processing. Annual data relating to this part are as follows: Division Q of the Nyers Company requires 15,000 units per year and is currently paying an outside supplier $33 per unit. Consider each part below independently.
If outside customers demand only 50,000 units per year, then according to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?
A) $35 per unit
B) $33 per unit
C) $28 per unit
D) $23 per unit

Question

Division P of the Nyers Company makes a part that can either be sold to outside customers or transferred internally to Division Q for further processing. Annual data relating to this part are as follows:  Division Q of the Nyers Company requires 15,000 units per year and is currently paying an outside supplier $33 per unit. Consider each part below independently.
If outside customers demand only 50,000 units per year, then according to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?
A) $35 per unit 
B) $33 per unit 
C) $28 per unit 
D) $23 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
However, there is no opportunity cost because ample idle capacity exists to satisfy Division Q's demand.
Transfer price > $23 per unit + $0 = $23 per unit

Division P of the Nyers Company Makes a Part That