Division G makes a part that it sells to customers outside of the company.Data concerning this part appear below:
Division H of the same company would like to use the part manufactured by Division G in one of its products.Division H currently purchases a similar part made by an outside company for $83 per unit and would substitute the part made by Division G.Division H requires 500 units of the part each period.Division G has ample capacity to produce the units for Division H without any increase in fixed costs and without cutting into sales to outside customers.If Division G sells to Division H rather than to outside customers,the variable cost be unit would be $2 lower.What should be the lowest acceptable transfer price from the perspective of Division G?
A) $47
B) $87
C) $83
D) $57

Question

Division G makes a part that it sells to customers outside of the company.Data concerning this part appear below:
 Division H of the same company would like to use the part manufactured by Division G in one of its products.Division H currently purchases a similar part made by an outside company for $83 per unit and would substitute the part made by Division G.Division H requires 500 units of the part each period.Division G has ample capacity to produce the units for Division H without any increase in fixed costs and without cutting into sales to outside customers.If Division G sells to Division H rather than to outside customers,the variable cost be unit would be $2 lower.What should be the lowest acceptable transfer price from the perspective of Division G?
A) $47 
B) $87 
C) $83 
D) $57

Quizplus · Accepted Answer

Because Division G has ample excess capacity and consequently there is no opportunity cost, the lowest price the part should be sold for is the variable cost that would be incurred or $47 per unit (= $49 per unit - $2 per unit).

Division G Makes a Part That It Sells to Customers