The West and East Divisions are part of the same company.Currently the East Division buys a part from West Division for $384 per unit.The West Division wants to increase the price of the part it sells to East Division by $96 to $480.The manager of the East Division has stated that he cannot pay that much insofar as the division's profit goes below zero.The manager of the East Division can buy the part from an outside supplier for $448 per unit.The cost data pertaining to the part is supplied by the West Division: If West Division does not produce the parts for the East Division,it will be able to avoid one-third of the fixed manufacturing overhead costs.The West Division has excess capacity but no alternative uses for the facilities.What is the minimum transfer price per unit that West Division should charge East Division?
A)$376
B)$390
C)$448
D)$480

Question

The West and East Divisions are part of the same company.Currently the East Division buys a part from West Division for $384 per unit.The West Division wants to increase the price of the part it sells to East Division by $96 to $480.The manager of the East Division has stated that he cannot pay that much insofar as the division's profit goes below zero.The manager of the East Division can buy the part from an outside supplier for $448 per unit.The cost data pertaining to the part is supplied by the West Division:  If West Division does not produce the parts for the East Division,it will be able to avoid one-third of the fixed manufacturing overhead costs.The West Division has excess capacity but no alternative uses for the facilities.What is the minimum transfer price per unit that West Division should charge East Division?
A)$376 
B)$390 
C)$448 
D)$480

Quizplus · Accepted Answer

The minimum transfer price per unit that West Division should charge East Division can be calculated as follows:
If West Division stops supplying parts to East Division, it will be able to avoid one-third of the fixed manufacturing overhead costs. This means that the fixed manufacturing overhead cost per unit of the part is $32 ($96/3).
Therefore, the minimum transfer price per unit that West Division should charge East Division is the sum of the variable cost per unit ($352) and the fixed manufacturing overhead cost per unit ($32), which is $384 per unit. So, the current transfer price is already at the minimum level.
If the West Division increases the price to $480, the East Division will suffer a loss of $96 per unit ($480 - $384), which is not acceptable as the division's profit will go below zero.
Thus, the East Division should continue to buy the parts from the West Division at the current transfer price of $384 per unit, as it is the most profitable option for both the divisions.

The West and East Divisions Are Part of the Same