Division A makes a part that it sells to customers outside of the company.Data concerning this part appear below: Division B of the same company would like to use the part manufactured by Division A in one of its products.Division B currently purchases a similar part made by an outside company for $38 per unit and would substitute the part made by Division A.Division B requires 5,000 units of the part each period.Division A has ample capacity to produce the units for Division B without any increase in fixed costs and without cutting into sales to outside customers.If Division A sells to Division B rather than to outside customers,the variable cost be unit would be $1 lower.What is the lowest acceptable transfer price Division A should accept?
A)$40
B)$38
C)$30
D)$29
E)$10

Question

Division A makes a part that it sells to customers outside of the company.Data concerning this part appear below:  Division B of the same company would like to use the part manufactured by Division A in one of its products.Division B currently purchases a similar part made by an outside company for $38 per unit and would substitute the part made by Division A.Division B requires 5,000 units of the part each period.Division A has ample capacity to produce the units for Division B without any increase in fixed costs and without cutting into sales to outside customers.If Division A sells to Division B rather than to outside customers,the variable cost be unit would be $1 lower.What is the lowest acceptable transfer price Division A should accept?
A)$40 
B)$38 
C)$30 
D)$29 
E)$10

Quizplus · Accepted Answer

The lowest acceptable transfer price Division A should accept is the variable cost per unit plus the opportunity cost per unit. The opportunity cost is the contribution margin per unit that Division A would forego by selling to Division B instead of outside customers.

Variable cost per unit for Division A = $1 lower than the variable cost per unit for outside customers = $38 - $1 = $37

Contribution margin per unit for Division A = selling price per unit for outside customers - variable cost per unit = $45 - $38 = $7

Therefore, the lowest acceptable transfer price is:

$37 + $7 = $44

However, this transfer price is greater than the price that Division B currently pays to an outside company, so Division B would not agree to purchase from Division A at this price.

The maximum price that Division B would pay is:

$38, the price currently paid to the outside company

So, the lowest acceptable transfer price for Division A is $38, the same price that Division B currently pays to the outside company.

Therefore, the best choice is D, $29.

Division a Makes a Part That It Sells to Customers