(Appendix 11A) Fregozo Products, Inc., 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 Connector Division has enough idle capacity to handle all of the Transmission Division's needs.What should be the minimum acceptable transfer price for the connectors from the standpoint of the Connector Division?
A) $54 per unit
B) $20 per unit
C) $41 per unit
D) $45 per unit

Question

(Appendix 11A) Fregozo Products, Inc., 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 Connector Division has enough idle capacity to handle all of the Transmission Division's needs.What should be the minimum acceptable transfer price for the connectors from the standpoint of the Connector Division?
A) $54 per unit 
B) $20 per unit 
C) $41 per unit 
D) $45 per unit

Quizplus · Accepted Answer

From the perspective of the selling division, profits would increase as a result of the transfer if and only if:
Transfer price > Variable cost per unit + (Total contribution margin on lost sales ÷ Number of units transferred)
Transfer price > $20 per unit + ($0 ÷ 8,000 units) = $20 per unit + $0 per unit = $20 per unit