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 80,000 units and if, by selling to Division Q, Division P could avoid $4 per unit in variable selling expense, 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) $21 per unit
C) $31 per unit
D) $33 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 80,000 units and if, by selling to Division Q, Division P could avoid $4 per unit in variable selling expense, 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) $21 per unit 
C) $31 per unit 
D) $33 per unit

Quizplus · Accepted Answer

Available capacity for outside sales = Capacity − Internal sales
= 80,000 units − 15,000 units = 65,000 units
Lost outside sales = Total outside demand − Available capacity for outside sales
= 80,000 units − 65,000 units = 15,000 units
Total contribution margin on lost sales = CM per unit × Lost outside sales
= ($35 per unit − $23 per unit) × 15,000 units = $180,000
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 > Variable cost per unit + (Total contribution margin on lost sales ÷ Number of units transferred)
Transfer price > ($23 per unit − $4 per unit) + ($180,000 ÷ 15,000 units)
Transfer price > $19 per unit + $12 per unit = $31 per unit

Division P of the Nyers Company Makes a Part That