Division X of Charter Corporation makes and sells a single product that is used by manufacturers of forklift trucks.Presently,it sells 12,000 units per year to outside customers at $24 per unit.The annual capacity is 20,000 units,and the variable cost to make each unit is $16.Division Y of Charter Corporation would like to buy 10,000 units a year from Division X to use in its products.There would be no cost savings from transferring the units within the company rather than selling them on the outside market.What should be the lowest acceptable transfer price from the perspective of Division X?
A) $16.00.
B) $17.60.
C) $21.40.
D) $24.00.

Question

Quizplus · Accepted Answer

The opportunity cost of selling 10,000 units to Division Y is the contribution margin that Division X would lose from selling those units externally.

Contribution margin per unit = Sales price - Variable cost

Contribution margin per unit = $24 - $16 = $8

Contribution margin lost per unit = $8

Total contribution margin lost = $8 x 10,000 = $80,000

Therefore, the transfer price from Division X's perspective should be at least equal to the variable cost plus the lost contribution margin, which is:

Transfer price = Variable cost + Contribution margin lost per unit

Transfer price = $16 + $8 = $24

However, this transfer price is the same as the external selling price, so it would not make sense for Division Y to buy from Division X.

Therefore, the transfer price should be lower than $24.

The minimum transfer price that Division X should accept is the variable cost per unit, as selling to Division Y at a price lower than that would result in a loss for Division X.

Minimum transfer price = Variable cost per unit = $16

Thus, the correct answer is B) $17.60.

Division X of Charter Corporation Makes and Sells a Single