Fingado Products, Inc., has a Detector Division that manufactures and sells a number of products, including a standard detector that could be used by another division in the company, the Commercial Security Division, in one of its products. Data concerning that detector appear below: The Commercial Security Division is currently purchasing 6,000 of these detectors per year from an overseas supplier at a cost of $91 per detector.
Assume that the Valve Division is selling all of the valves it can produce to outside customers. Also assume that $6 in variable expenses can be avoided on transfers within the company due to reduced shipping and selling costs. What should be the minimum acceptable transfer price for the valves from the standpoint of the Valve Division?
A) $92 per unit
B) $77 per unit
C) $91 per unit
D) $98 per unit

Question

Fingado Products, Inc., has a Detector Division that manufactures and sells a number of products, including a standard detector that could be used by another division in the company, the Commercial Security Division, in one of its products. Data concerning that detector appear below:  The Commercial Security Division is currently purchasing 6,000 of these detectors per year from an overseas supplier at a cost of $91 per detector.
Assume that the Valve Division is selling all of the valves it can produce to outside customers. Also assume that $6 in variable expenses can be avoided on transfers within the company due to reduced shipping and selling costs. What should be the minimum acceptable transfer price for the valves from the standpoint of the Valve Division?
A) $92 per unit 
B) $77 per unit 
C) $91 per unit 
D) $98 per unit

Quizplus · Accepted Answer

The total contribution margin on lost sales is computed as follows:
 11eacbfc_c7da_7088_8ffe_fd5a4652915e_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 per unit − $6 per unit) + ($396,000 ÷ 6,000 units) = $26 per unit + $66 per unit = $92 per unit