Division A of Harkin Company has the capacity for making 3,000 motors per month and regularly sells 1,950 motors each month to outside customers at a contribution margin of $62 per motor. The variable cost per motor is $35.70. Division B of Harkin Company would like to obtain 1,400 motors each month from Division A. What should be the lowest acceptable transfer price from the perspective of Division A?
A) $26.57
B) $51.20
C) $35.70
D) $62.00

Question

Quizplus · Accepted Answer

Division A can sell 1,950 motors per month to outside customers at a contribution margin of $62 per motor, which means the total contribution margin is $62 x 1,950 = $120,900.

If Division A were to transfer 1,400 motors to Division B, they would have 1,950 - 1,400 = 550 motors left to sell to outside customers. This means the contribution margin from outside customers would reduce to $62 x 550 = $34,100.

Therefore, the minimum transfer price that Division A should accept is the opportunity cost of selling those 1,400 motors externally, which would be $120,900 - $34,100 = $86,800.

The variable cost per motor is $35.70, so if Division A accepts the transfer at this price, they would only make a contribution margin of $62 - $35.70 = $26.30 per motor transferred.

Therefore, the lowest acceptable transfer price for Division A should be $86,800/1,400 = $62 - $26.30 = $35.70 per motor, which is the variable cost per motor. Any lower price would result in a loss for Division A.

Option D is incorrect because $62 is the contribution margin per motor, and transfer pricing should consider the variable cost per motor as well. Option A is incorrect because it does not account for the opportunity cost of selling to outside customers. Option C is incorrect because it does not consider the opportunity cost of selling to outside customers, which would affect Division A's overall profitability.

Division a of Harkin Company Has the Capacity for Making