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Tuttle Motorcycles Inc. manufactures and sells high-priced motorcycles. The Engine Division produces and sells engines to other motorcycle companies and internally to the Production Division. It has been decided that the Engine Division will sell 20,000 units to the Production Division at $1,050 a unit. The Engine Division, currently operating at capacity, has a unit sales price of $2,550 and unit variable costs and fixed costs of $1,050 and $750, respectively. The Production Division is currently paying $2,400 per unit to an outside supplier. $90 per unit can be saved on internal sales from reduced selling expenses.
-What is the minimum transfer price that the Engine Division should accept?
A) $2,460
B) $2,550
C) $2,400
D) $1,500

Question

Quizplus · Accepted Answer

The minimum transfer price that the Engine Division should accept is equal to its variable costs, which is $1,050 per unit. However, in this case, the Engine Division has the opportunity to sell internally to the Production Division at a higher price of $1,050 per unit. Therefore, the minimum transfer price that the Engine Division should accept is the variable cost of $1,050 per unit.

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