(Appendix 12A)Division T of Clocker Company makes a timer which it sells for $30 to outside customers.The division has supplied the following data concerning the timer: Division S of Clocker Company is currently buying 5, 000 similar timers each month from an overseas supplier at $27 each.Division S would like to acquire its timers from Division T if the price is right. Suppose that Division T can sell only 10, 000 timers to outside customers.According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?
A)$24 per timer
B)$27 per timer
C)$30 per timer
D)$15 per timer

Question

(Appendix 12A)Division T of Clocker Company makes a timer which it sells for $30 to outside customers.The division has supplied the following data concerning the timer:  Division S of Clocker Company is currently buying 5, 000 similar timers each month from an overseas supplier at $27 each.Division S would like to acquire its timers from Division T if the price is right. Suppose that Division T can sell only 10, 000 timers to outside customers.According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?
A)$24 per timer 
B)$27 per timer 
C)$30 per timer 
D)$15 per timer

Quizplus · Accepted Answer

Available capacity for outside sales = Capacity - Internal sales
= 12, 000 timers - 5, 000 timers = 7, 000 timers
Lost outside sales = Total outside demand - Available capacity for outside sales
= 10, 000 timers - 7, 000 timers = 3, 000 timers
Total contribution margin on lost sales = CM per unit × Lost outside sales
= ($30 per timer - $15 per timer)× 3, 000 timers = $45, 000
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 > Variable cost per unit + (Total contribution margin on lost sales ÷ Number of units transferred)
Transfer price > $15 per timer + ($45, 000 ÷ 5, 000 timers)= $15 per timer + $9 per timer = $24 per timer

(Appendix 12A)Division T of Clocker Company Makes a Timer Which