(Appendix 11A) Division P of the Nyers Company makes a part that can either be sold to outside customers or transferred internally to Division Q for further processing. Annual data relating to this part are as follows:
Division Q of the Nyers Company requires 15,000 units per year and is currently paying an outside supplier $33 per unit. Consider each part below independently.
-If outside customers demand only 50,000 units per year,then according to the formula in the text,what is the lowest acceptable transfer price from the viewpoint of the selling division?
A) $35 per unit
B) $33 per unit
C) $28 per unit
D) $23 per unit

Question

(Appendix 11A) Division P of the Nyers Company makes a part that can either be sold to outside customers or transferred internally to Division Q for further processing. Annual data relating to this part are as follows:
  Division Q of the Nyers Company requires 15,000 units per year and is currently paying an outside supplier $33 per unit. Consider each part below independently.
-If outside customers demand only 50,000 units per year,then according to the formula in the text,what is the lowest acceptable transfer price from the viewpoint of the selling division?
A) $35 per unit 
B) $33 per unit 
C) $28 per unit 
D) $23 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 + Opportunity cost per unit
However, there is no opportunity cost because ample idle capacity exists to satisfy Division Q's demand.
Transfer price > $23 per unit + $0 = $23 per unit

(Appendix 11A) Division P of the Nyers Company Makes a Part