Nanke Products, Incorporated, has a Sensor Division that manufactures and sells a number of products, including a standard sensor that could be used by another division in the company, the Safety Products Division, in one of its products. Data concerning that sensor appear below: The Safety Products Division is currently purchasing 3,000 of these sensors per year from an overseas supplier at a cost of $59 per sensor. Assume that the Sensor Division is selling all of the sensors it can produce to outside customers. What should be the minimum acceptable transfer price for the sensors from the standpoint of the Sensor Division?
A) $37 per unit
B) $59 per unit
C) $20 per unit
D) $64 per unit

Question

Nanke Products, Incorporated, has a Sensor Division that manufactures and sells a number of products, including a standard sensor that could be used by another division in the company, the Safety Products Division, in one of its products. Data concerning that sensor appear below:  The Safety Products Division is currently purchasing 3,000 of these sensors per year from an overseas supplier at a cost of $59 per sensor. Assume that the Sensor Division is selling all of the sensors it can produce to outside customers. What should be the minimum acceptable transfer price for the sensors from the standpoint of the Sensor Division?
A) $37 per unit 
B) $59 per unit 
C) $20 per unit 
D) $64 per unit

Quizplus · Accepted Answer

The minimum acceptable transfer price for the sensor should be its full cost plus a markup to cover the profit that the Sensor Division would otherwise make if it sold the sensors to an outside customer.

To determine the full cost of the sensor, we need to consider the manufacturing cost plus any additional costs required to sell the sensor to the Safety Products Division, such as shipping costs or administrative expenses.

Assuming that the Sensor Division is currently selling all of its sensors to outside customers, we can infer that the market price for the sensor is at least as high as the cost of production. Therefore, the minimum transfer price for the sensor should include a markup to cover the profit that the Sensor Division would otherwise make by selling the sensor to an outside customer.

We can calculate the minimum transfer price as follows:
Full cost per sensor = Manufacturing cost + Additional costs
Manufacturing cost per sensor = $16
Additional costs per sensor = $2 (assumed)
Full cost per sensor = $16 + $2 = $18
Minimum transfer price per sensor = Full cost per sensor + Markup
Markup = Profit per sensor that the Sensor Division would otherwise make by selling to an outside customer
Profit per sensor = Market price - Full cost per sensor
Market price per sensor = $59 (given)
Profit per sensor = $59 - $18 = $41
Minimum transfer price per sensor = $18 + $41 = $59

Therefore, the minimum acceptable transfer price for the sensors from the standpoint of the Sensor Division should be $64 per unit, which is the same as the market price of $59 plus a markup of $41.

Nanke Products, Incorporated, Has a Sensor Division That Manufactures and Sells