The Vega Division of Ace Company makes wheels that can either be sold to outside customers or transferred to the Walsh Division of Ace Company. Last month, the Walsh Division bought all 4,000 of its wheels from the Vega Division for $ \$ 42 $ each. The following data are available from last month's operations for the Vega Division:
$\begin{array}{|l|r|}
\hline \text { Capacity } & 12,000 \text { wheels } \
\hline \text { Selling Price per Wheel to Outside Customers } & \$ 45 \
\hline \text { Variable Costs per Wheel Sold to Outside Customers } & \$ 30 \
\hline
\end{array}$
If the Vega Division sells wheels to the Walsh Division, Vega can avoid \$2 per wheel in sales commissions. An outside supplier has offered to supply wheels to the Walsh Division for $ \$ 41 $ each.
- Suppose that the Vega Division has ample idle capacity so that transfers to the Walsh Division would not cut into its sales to outside customers.What should be the lowest acceptable transfer price from the perspective of the Vega Division?
A) $28.
B) $30.
C) $42.
D) $45.

Question

Quizplus · Accepted Answer

The lowest acceptable transfer price for the Vega Division would be the variable cost per wheel sold to outside customers ($30) minus the avoided sales commissions per wheel ($2), resulting in $28. This is because the Vega Division would not incur the sales commission when transferring wheels internally, and with ample idle capacity, selling internally would not affect its ability to sell to outside customers.

The Vega Division of Ace Company Makes Wheels That Can $42 \$ 42 $42

The Vega Division of Ace Company Makes Wheels That Can $\$ 42$