Fregozo Products, Incorporated, has a Connector Division that manufactures and sells a number of products, including a standard connector that could be used by another division in the company, the Transmission Division, in one of its products. Data concerning that connector appear below: The Transmission Division is currently purchasing 8,000 of these connectors per year from an overseas supplier at a cost of $45 per connector.Assume that the Valve Division is selling all of the valves it can produce to outside customers. Also assume that $10 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) $31 per unit
B) $54 per unit
C) $44 per unit
D) $45 per unit

Question

Fregozo Products, Incorporated, has a Connector Division that manufactures and sells a number of products, including a standard connector that could be used by another division in the company, the Transmission Division, in one of its products. Data concerning that connector appear below:  The Transmission Division is currently purchasing 8,000 of these connectors per year from an overseas supplier at a cost of $45 per connector.Assume that the Valve Division is selling all of the valves it can produce to outside customers. Also assume that $10 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) $31 per unit 
B) $54 per unit 
C) $44 per unit 
D) $45 per unit

Quizplus · Accepted Answer

The minimum acceptable transfer price for the valves should be calculated as follows:
Total cost per unit = Variable manufacturing cost + (Opportunity cost per unit - Avoidable costs per unit)
= $20 + ($45 - $10)
= $55
Therefore, the minimum acceptable transfer price for the valves is $55 per unit. Since Valve Division is selling all of its valves to outside customers, the opportunity cost of selling one unit of valve to the Connector Division is $55, which is higher than the cost of purchasing from the overseas supplier, $45. Therefore, the transfer pricing should be set at a minimum of $55 per unit, and the option C is the only choice that falls within this range.

Fregozo Products, Incorporated, Has a Connector Division That Manufactures and Sells