Division X makes a part that it sells to customers outside of the company.Data concerning this part appear below:
$\begin{array}{|l|r|}
\hline \text { Selling Price to Outside Customers } & \$ 50 \
\hline \text { Variable cost per Unit } & \$ 30 \
\hline \text { Total Fixed Costs } & \$ 400,000 \
\hline \text { Capacity in Units } & 25,000 \
\hline
\end{array}$
Division Y of the same company would like to use the part manufactured by Division X in one of its products.Division Y currently purchases a similar part made by an outside company for $49 per unit and would substitute the part made by Division X.Division Y requires 5,000 units of the part each period.Division X has ample excess capacity to handle all of Division Y's needs without any increase in fixed costs and without cutting into outside sales.According to the transfer pricing formula,what is the lower limit on the transfer price?
A) $30.
B) $46.
C) $49.
D) $50.

Question

Quizplus · Accepted Answer

The lower limit on the transfer price is the variable cost per unit, which is $30. This is because Division X would not want to sell the part for less than it costs to produce it, especially since the sale to Division Y does not affect its fixed costs or its ability to sell to outside customers.

Division X Makes a Part That It Sells to Customers