(Appendix 12A)Division 1 of Ace Company makes and sells wheels that can either be sold to outside customers or transferred to Division 2.The following data are available from last month: Division 1: Division 2: If Division 1 sells the wheels to Division 2, Division 1 can avoid $2 per unit in sales commissions.
Suppose that Division 1 sells 7, 500 units per month to outside customers.According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division if Division 2 requires 5, 000 units per month from Division 1?
A)$33 per unit
B)$35 per unit
C)$47 per unit
D)$50 per unit

Question

(Appendix 12A)Division 1 of Ace Company makes and sells wheels that can either be sold to outside customers or transferred to Division 2.The following data are available from last month: Division 1:  Division 2:  If Division 1 sells the wheels to Division 2, Division 1 can avoid $2 per unit in sales commissions.
Suppose that Division 1 sells 7, 500 units per month to outside customers.According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division if Division 2 requires 5, 000 units per month from Division 1?
A)$33 per unit 
B)$35 per unit 
C)$47 per unit 
D)$50 per unit

Quizplus · Accepted Answer

In this situation there is no opportunity cost because there is ample idle capacity to fill the order from Division 2.
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
Transfer price > ($35 per unit - $2 per unit)+ $0 per unit = $33 per unit

(Appendix 12A)Division 1 of Ace Company Makes and Sells Wheels