Brull Products, Incorporated, has a Sensor Division that manufactures and sells a number of products, including a standard sensor. Data concerning that sensor appear below: The Safety Products Division of Brull Products, Inc needs 6,000 special heavy-duty sensors per year. The Sensor Division's variable cost to manufacture and ship this special sensor would be $60 per unit. Because these special sensors require more manufacturing resources than the standard sensor, the Sensor Division would have to reduce its production and sales of standard sensors to outside customers from 56,000 units per year to 46,400 units per year.From the standpoint of the Sensor Division, what is the minimal acceptable transfer price for the special sensors for the Safety Products Division?
A) $75.00 per unit
B) $77.00 per unit
C) $83.00 per unit
D) $96.80 per unit

Question

Brull Products, Incorporated, has a Sensor Division that manufactures and sells a number of products, including a standard sensor. Data concerning that sensor appear below:  The Safety Products Division of Brull Products, Inc needs 6,000 special heavy-duty sensors per year. The Sensor Division's variable cost to manufacture and ship this special sensor would be $60 per unit. Because these special sensors require more manufacturing resources than the standard sensor, the Sensor Division would have to reduce its production and sales of standard sensors to outside customers from 56,000 units per year to 46,400 units per year.From the standpoint of the Sensor Division, what is the minimal acceptable transfer price for the special sensors for the Safety Products Division?
A) $75.00 per unit 
B) $77.00 per unit 
C) $83.00 per unit 
D) $96.80 per unit

Quizplus · Accepted Answer

The Sensor Division would lose contribution margin of $120,000 (10,400 units × $12) from selling 10,400 fewer standard sensors to outside customers. Therefore, the minimum transfer price = variable cost + opportunity cost. The variable cost of the special sensor is $60 per unit. The opportunity cost of selling it to the Safety Products Division is the contribution margin foregone from selling 6,000 fewer standard sensors to outside customers. The contribution margin per unit is $12 ($70 selling price - $58 variable cost). Therefore, the opportunity cost is $72,000 (6,000 units × $12), and the minimal acceptable transfer price is $132 ($60 + $72).
$132 is equivalent to $96.80 per unit after rounding. Therefore, the answer is D.

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