Use the following information to answer questions
Division A produces a product that it sells to the outside market.It has compiled the following:
-Division B of the same company is currently buying an identical product from an outside provider for $38 per unit.It wishes to purchase 5,000 units per year from Division A.Division A is currently selling 26,000 units of the product per year.If the internal transfer is made, Division A will not incur any selling costs.What would be the minimum transfer price per unit that Division A would be willing to accept?
A)$10.00
B)$14.60
C)$15.40
D)$40.00

Question

Use the following information to answer questions
Division A produces a product that it sells to the outside market.It has compiled the following: 
-Division B of the same company is currently buying an identical product from an outside provider for $38 per unit.It wishes to purchase 5,000 units per year from Division A.Division A is currently selling 26,000 units of the product per year.If the internal transfer is made, Division A will not incur any selling costs.What would be the minimum transfer price per unit that Division A would be willing to accept?
A)$10.00 
B)$14.60 
C)$15.40 
D)$40.00

Quizplus · Accepted Answer

To calculate the minimum transfer price per unit that Division A would be willing to accept, we need to consider the relevant cost for Division A. 
The relevant cost for Division A is the variable cost which amounts to $12.20 per unit (as given in the information provided). 
Hence, to make a profit, Division A would not sell at a price lower than $12.20 per unit. 
We also need to consider the opportunity cost of selling to Division B instead of the outside market. If Division A sells 5,000 units to Division B, it will reduce the number of units it can sell to the outside market (26,000 - 5,000 = 21,000 units). 
Assuming Division A can still sell all 21,000 units to the outside market at the current price of $38 per unit, it would generate a revenue of $798,000 (21,000 units x $38 per unit). 
The total variable cost for producing 26,000 units is $317,200 (26,000 units x $12.20 per unit). 
To determine the minimum transfer price per unit that Division A would be willing to accept, we need to ensure that the revenue from the internal transfer is at least equal to the revenue from the outside market minus the variable cost:

(5,000 units x Minimum Transfer Price) ≥ ($798,000 - $317,200) 
Minimum Transfer Price ≥ $96.36 / 5,000 = $19.27 per unit

Thus, the minimum transfer price per unit that Division A would be willing to accept is $19.27 per unit. However, Division A would not sell at a price lower than its variable cost, which is $12.20 per unit. 
Therefore, the minimum transfer price that Division A would be willing to accept is the higher of the two prices, which is $19.27 per unit. 
Since option C ($15.40) is the closest to this minimum transfer price, it is the best choice.

Use the Following Information to Answer Questions